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# Expected Rate of Return and Constant Growth Model

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Use the CAPM to calculate the Expect Rate of Return = "r"

Based on the assumptions that:

Risk Free Rate = 3.50% Rf
Market Return = 12.00% Rm

We found the Beta of AB 217 Corp = 0.85
SO
CAPM = Rf + Beta(RM - Rf) r = Question 1

This will be the "r" value that is used in the CGM.

Estimate the value of "g" ... the constant growth rate ..

Calculate the Dividend Growth Rate of AB 217 for Constant Growth Model (CGM)
We use actuall AB 217 history

PV (\$1.20) Dividend paid 6 years ago. Negative so Excel can do the math
FV \$1.55 Dividend paid this year = Do)
n 6
PMT 0
Rate This will be the Dividend Growth Rate ... = g Question 2

Constant Growth Model

Estimate the value of AB 217 stock using the CGM

D1 = Question 3

Po = #DIV/0! Question 4

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## SOLUTION This solution is FREE courtesy of BrainMass!

1. CAPM = r = Rf + Beta(Rm-Rf) = 0.035 + 0.85(0.12-0.035) = 0.10725 = 10.73%

2. g = (FV/PV)^(1/n) - 1 = (1.55/1.20)^(1/6) - 1 = 0.044 = 4.4%

3. D1 = Do(1+g) = 1.55(1+0.044) = \$1.62

4. Po = D1 / (r-g) = 1.62 / (0.1073 - 0.044) = \$25.6

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

© BrainMass Inc. brainmass.com October 2, 2022, 7:00 am ad1c9bdddf>
https://brainmass.com/statistics/central-tendency/expected-rate-return-constant-growth-model-514625