Metro company has a beta of 1.20, the risk free rate of return is currently ---- (consider the current rate of treasury bills) and the market return is 14%. Thecompany, which plans to pay a dividend of Rs 2.60 per share in the coming year (2007) anticipates that its future dividends will increase at an annual rateconsistent with that experienced over the 2002- 2006 period, when the following dividends were paid.Year2000 2001 2002 2003 2004 2005 2006Div./share 1.73 1.80 1.82 1.95 2.10 2.28 2.45Required:1. Use the capital asset pricing model to determine the required return on giant stock.2. Using the constant growth model and your finding in part a), estimate the value of company stock.

Formula for calculating required rate using CAPM is:

Answered: Metro company has a beta of 1.20, the…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Metro company has a beta of 1.20, the risk free rate of return is currently ----- (consider the current rate of treasury bills) and the market return is 14%. The company, which plans to pay a dividend of Rs 2.60 per share in the coming year (2007) anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2002- 2006 period, when the following dividends were paid. Year 2000 2001 2002 2003 2004 2005 2006 Div./share 1.73 1.80 1.82 1.95 2.10 2.28 2.45 Use the capital asset pricing model to determine the required return on giant stock.
A stock price P0=$23, and is expected to pay D1 = $1.242 one year from now and to grow at a constant rate of g=8% in the future. Suppose this analysis was conducted in January 1, 2002, what is the expected price at the end of 2002 and what is the Capital gains yield?
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