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problem: Cargo Point, Inc. has a beta of 1.10. The risk-free rate of interest is currently six percent, & the required return on the market portfolio is 13 percent. The company plans to pay a dividend of $2.91 in the coming year & anticipates that its future dividends will rise at an yearly rate consistent with that of the 2003-2005 periods:

Year

Dividend

2005

$2.67

2004

$2.45

2003

$2.25

Determine the value of Cargo Point, Inc. stock.

Required Rate of Return

Kb = Rf + b(Km - Rf)

Kb

Rate of Return

 

Rf

Rate of return on risk free securities

 

Km

rate of return on market portfolio

 

b

beta

 

Km - Rf

Risk Premium

 

Kb

 

 

Rf

 

6%

Km

 

13%

b

 

1.1

Km-Rf

 

 

Required rate of return

 

 

Km - Kf

 

0.07

b(Km - Kf)

 

0.077

Rf + b (Km - Rf)

 

13.70%

 

Share Valuation

Po

 

Net proceeds / Current Market Price

D1

$2.91

Expected dividend per share

Ke

13.70%

Rate of return

g

9%

Growth rate

 

Po

D / (Ke - g)

Ke-g

0.047

Po

$61.91

 

 

 

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M921039

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