Explore BrainMass

Explore BrainMass

    Stock Valuation using CAPM and Dividend Growth Model

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Determine the expected return using these two methods for the three stocks below using the Capital Asset Pricing Model (CAPM) and is determined as: Kj = rf + beta (rm-rf) and by using the dividend growth model: Ke = D1/Po + g. (Please show work so I can get a better understanding).

    Microsoft Corporation (NasdaqGS: MSFT)
    Sector: Technology
    Industry: Application Software
    Beta: 0.98
    Stock's price percentage change: ($28.18 - $17.42) / $17.42 = 61.77%

    Wal-Mart Stores (NYSE: WMT)
    Sector: Services
    Industry: Discount, Variety Stores
    Beta: 0.25
    Stock's price percentage change: ($53.43 - $45.58) / $45.58 = 17.22%

    JP Morgan Chase Company (NYSE: JPM)
    Sector: Financial
    Industry: Money Center Banks
    Beta: 1.17
    Stock's price percentage change: ($38.94 - $25.06) / $25.06 = 55.39%

    S&P 500 Index (SNP: ^GSPC)
    Percentage change: (1,073.87 - 825.44)/ 825.44 = 30.10%.

    © BrainMass Inc. brainmass.com June 3, 2020, 11:46 pm ad1c9bdddf
    https://brainmass.com/business/capital-asset-pricing-model/stock-valuation-capm-dividend-growth-model-297383

    Solution Preview

    See attached file.

    Please find guidelines for calculating expected returns using CAPM & Dividend Growth Model.

    Running Head: CAPM & GROWTH MODEL

    CAPM & Dividend Growth Model

    CAPM method
    Microsoft Corporation:
    Risk free rate (rf) = 2.33% (as per return on 5 year treasury bond)
    Beta = 0.98
    Market return (rm) = 30.10% (as per S&P index return)
    Kj = rf + beta(rm-rf)
    Kj = 2.33% + 0.98 (30.10%-2.33%)
    = 2.33% + 0.98*27.77
    = 2.33 + 27.2146
    =29.5446%
    Wal-Mart Stores Inc:
    Risk free rate (rf) = 2.33% (as per ...

    Solution Summary

    The solution determines the stock valuation using CAPM and dividend growth model.

    $2.19

    ADVERTISEMENT