Stock Valuation Problem:

The English Corporation has a beta of 1.30x, the risk-free rate of interest is currently 9% and the required return on the market portfolio is 12%. The Company plans to pay a dividend of $1.30 per share in the coming year and anticipates that future dividends will increase at an annual rate consistent with that experienced over the 2006 – 2009 period as shown below:

Year                 Dividend per share

2009                $1.25

2008                $1.17

2007                $1.15

2006                $1.10

(I calculate the compound annual growth rate of dividends to be 4.35%, as follows :)

Financial calculator keystrokes:

1.10    +|-     PV

3                    N

0                   PMT

1.25              FV

CPT               I/Y   =    4.35%

1. First, using CAPM, what is the required return for an investor in the English Company?

2. Now, using the constant dividend growth model, estimate the value of the English Company’s common stock.