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Stock Valuation using CAPM and Dividend Growth Model

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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%.

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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