Purchase Solution

Current Stock Price using CAPM and DDM

Not what you're looking for?

Ask Custom Question

A company currently pays a dividend of $2 per share, D0=2. It is estimated that the company's dividend will grow at a rate of 20 percent per year for the next 2 years, then the dividend will grow at a constant rate of 7 percent thereafter. The company's stock has a beta equal to 1.2, the risk-free rate is 7.5 percent, and the market risk premium is 4 percent. What would you estimate is the stock's current price?

Purchase this Solution

Solution Summary

The solution calculates the stock price first by calculating the required rate of return using CAPM (Capital Asset Pricing Model) and then arrives at the stock price using Dividend Discount Model (DDM) - discounts the dividends using the discount rate = required rate of return.

Solution Preview

First we calculate required rate of return using CAPM equation
r= r f + beta x (r m - r f)

r f = 7.5%
beta= 1.2
r m = 11.5% =7.5%+4%
r = ? To be determined
Substituting the ...

Purchase this Solution

Free BrainMass Quizzes
Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Organizational Behavior (OB)

The organizational behavior (OB) quiz will help you better understand organizational behavior through the lens of managers including workforce diversity.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Situational Leadership

This quiz will help you better understand Situational Leadership and its theories.