Purchase Solution

Expected Rate of Return and Constant Growth Model

Not what you're looking for?

Ask Custom Question

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

Purchase this Solution
Solution Summary

The expected rate of return and constant growth models are examined. The risk free rate are provided.

Solution Preview

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

Purchase this Solution
Free BrainMass Quizzes
Measures of Central Tendency

This quiz evaluates the students understanding of the measures of central tendency seen in statistics. This quiz is specifically designed to incorporate the measures of central tendency as they relate to psychological research.

Measures of Central Tendency

Tests knowledge of the three main measures of central tendency, including some simple calculation questions.

Know Your Statistical Concepts

Each question is a choice-summary multiple choice question that presents you with a statistical concept and then 4 numbered statements. You must decide which (if any) of the numbered statements is/are true as they relate to the statistical concept.

Terms and Definitions for Statistics

This quiz covers basic terms and definitions of statistics.

View More Free Quizzes
Related BrainMass Solutions

  • Finance inquiries

    It is appropriate to use the constant growth model to estimate stock value even if the growth rate is never expected to become constant. C. Two firms with the same expected dividend and growth rate must also have the same stock price. D.

  • Constant growth valuation formula for stocks

    the constant growth valuation formula, evaluates for each of the three stocks, next dividend , current price, required return, expected dividend growth rate, and dividend yield.

  • Portfolio Expected Rate of Return and Beta and the Constant Dividend Growth Model

    589610 Portfolio Expected Rate of Return and Beta and the Constant Dividend Growth Model Monica Dubois, an ABC investment advisor, has a new client, Mr. Jack Klein. Mr.

  • Expected rate of return on the stock

    48388 Finance - Growth and Rate of Return 1. Constant-Growth Model. Waterworks has a dividend yield of 8 percent.

  • Growth rate in dividends

    If investors believe that the expected rate of return on XYZ is 14%, what growth rate in dividends must be expected?

  • Stock Valuation Models

    Long run growth of company=Growth in dividend=g=(3.25-3)/3=8.3333% D0=Dividend in current year=$3.25 D1=Expected dividend next year=D0*(1+g)=3.25*(1+8.3333%)=$3.520833 Required rate of return=14% According to Constant Growth model current price of

  • BrainMass Expert's Approach to: Stock valuation

    Again using the constant growth model Current price = D1/(rs-g) = 1/(11%-5%) = $16.67 A stock just paid a dividend of $1. The required rate of return is rs = 11%, and the constant growth rate is 5%. What is the current stock price?

  • Stock valuation

    c) If a stock has a required rate of return of 12%, and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yeild is also 5%.

  • Constant Growth Stock Valuation

    or P0) to be $42.86; the expected dividend of $3 (D1); and the dividend growth rate of 3% (g).

View More Related Solutions