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Stock Value Using CAPM and DDM

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Frazier Manufacturing paid a dividend last year of $2, which is expected to grow at a constant rate of 5%. Frazier has a beta of 1.3. If the market is returning 11% and the risk-free rate is 4%, calculate the
value of Frazier's stock.

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Solution Preview

See excel spreadsheet attached.

1) We first calcuate the required return on equity using CAPM

CAPM (Capital Asset Pricing Model) equation is:
r A= r f + βA (r m - r f)

risk free rate= r f ...

Solution Summary

This solution calculates Stock Value using Capital Asset Pricing Model (CAPM) and Dividend Discount Model (DDM) with step-by-step workings and all formulas shown in excel file.

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Current Stock Price using CAPM and DDM

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?

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