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Gorden growth model & CAPM (Intel corp)

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Pick a company that pays dividends, then calculate the expected growth rate of your company using the CAPM.

Once this task is complete, calculate the expected growth rate using the Constant Growth (or Gordon Growth) Model.

You may need additional information to complete this exercise. You can find a stock's beta and growth rate at http://quote.yahoo.com/. Once there, enter the ticker for the company in question. Then, click on "Key Statistics" about halfway down the left hand side of the page. You can find the beta here.

Alternatively, you can go to http://www.reuters.com/. Click on "Stocks" at the top left of the page. Enter the ticker symbol for the company in question. Click on "Ratios" about halfway down the left hand side of the page.

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Gorden Growth model:

D= expected dividend per share one year from now.
K=cost of capital .i.e, required rate of return of the equity investor
Required rate of return means the rate of return needed to induce investors or companies to invest in something.
G=growth rate in dividends in perpetuity.

Dividend 5 year growth ...

Solution Summary

The answer contains the computation of expected growth rate of Intel corp under Gorden growth model and CAPM.

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High Growth or Stable Growth

Intel Corp is a leading manufacturer of semiconductor chips. Although Intel continues to grow, the industry in which it operates has matured so there is some question whether the firm should be evaluated as a high-growth company or stable growth company.

See spreadsheet to answer the following

a) Is Intel's current stock price of $20.88 reasonable in light of its sector, industry and comparison firms?

b) Intel has a beta coefficient of 1.66, a risk-free rate of 5.02% and a market risk premium of 5%, what is your estimate of the required rate of return using CAPM. What rate of growth in earnings is consisten with Intel's policy of paying out 40% of earnings in dividends and the firm's historical return on equity: Using your estimated growth rate, wht is the value of Intel's shares using the Gordon (single-stage) growth model? Analyze the reasonableness of your estimated value per share using the Gordon model.

c) Using your analysis in part b above, what growth rate is consistent with Intel's current share price of $20.88?

d) Analysts expect Intel's earnings to grow at a rate of 12% per year over the next five years. What rate of growth from Year 6 forward (forever) is needed to warrant Intel's current stock price (use our CAPM estimate of the required rate of return on equity)? (Hint: Use a two-stage growth model where Intel's earnings grow for five years at 12% and from Year 6 forward at a constant rate.)

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