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    Expected Rate of Return and Constant Growth Model

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

    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

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

    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

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