Addidas Inc. wishes to determine the value of Nike Corp., a company that it is considering acquiring for cash. Addidas wishes to use the capital asset pricing model (CAPM) to determine the applicable discount rate to use as an input to the constant-growth valuation model. Nike Corp’s is not publicly traded. After studying the betas of firms similar to Nike Corp that are publicly traded, Addidas Inc. believes that an appropriate beta for Nike Corp’s stock would be 1.25. The risk-free rate is currently 9%, and the market return is 13%. Nike Corp’s dividend per share for each of the past 6 years is shown in the following table. a) Given that Nike Corp is expected to pay a dividend of $3.68 next year, determine the maximum cash price that Addidas Inc. should pay for each share of Craft. b) Discuss the use of the CAPM for estimating the value of common stock, and describe the effect on the resulting value of Nike Corp’s: (i) A decrease in its dividend growth rate of 2% from that exhibited over the 2017–2021 (ii) A decrease in its beta to 1
Addidas Inc. wishes to determine the value of Nike Corp., a company that it is considering acquiring for cash. Addidas wishes to use the
a) Given that Nike Corp is expected to pay a dividend of $3.68 next year, determine the maximum cash price that Addidas Inc. should pay for each share of Craft.
b) Discuss the use of the CAPM for estimating the value of common stock, and describe the effect on the resulting value of Nike Corp’s:
(i) A decrease in its
(ii) A decrease in its beta to 1.
Step by step
Solved in 3 steps with 1 images
