problem: Cargo Point, Inc. has a beta of 1.10. The riskfree 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 20032005 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

KmRf



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)

Keg

0.047

Po

$61.91
