Problem:

ABC Corporation has a current dividend of $2. Its dividend one year from today is expected to grow at 10% over the next three years, then 3% indefinitely (year 4 on). The current risk free rate on a 10-year T-bill is 3%, and the market risk premium is 5%. ABC's current beta is estimated to be 1.2.

Required:

Question 1: What is ABC's estimated cost of equity using the Capital Asset Pricing Model (CAPM)?

Question 2: Calculate the estimated price of ABC Corporation.

Question 3: How might you decide whether or not to invest in ABC Corporation?

Note: Provide support for your underlying principle.