You have assigned the following values to these three firms: Price Upcoming Divi
ID: 2656086 • Letter: Y
Question
You have assigned the following values to these three firms: Price Upcoming Dividend Growth Beta US Bancorp $ 47.45 $ 2.95 6.60 % 1.80 Praxair 60.70 1.80 18.50 2.73 Eastman Kodak 46.25 2.00 7.80 0.75 Assume that the market portfolio will earn 10.80 percent and the risk-free rate is 3.00 percent. Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations. Round your final answer to 2 decimal places.)
CAPM Constant-growth model
US Bancorp required return % %
Praxair required return % %
Eastman Kodak required return % %
Explanation / Answer
Company
CAPM
Constant Growth
Stocks
US Bancorp
17.04%
12.82%
Praxair
24.29%
21.47%
Eastman Kodak
8.85%
12.12%
WORKING:
CAPM (see last column for returns):
Company
Risk free rate
Market Return
Beta
CAPM Working
Expected return
Stocks
Rf
Rm
B
Ri = Rf+B*(Rm-Rf)
Ri = Rf+B*(Rm-Rf)
US Bancorp
3.00%
10.80%
1.80
=3%+1.80*(10.8%-3%)
17.04%
Praxair
3.00%
10.80%
2.73
=3%+2.73*(10.8%-3%)
24.29%
Eastman Kodak
3.00%
10.80%
0.75
=3%+0.75*(10.8%-3%)
8.85%
Constant growth model or DDM (see last row for returns):
Given details
US Bancorp
Praxair
Eastman Kodak
Existing growth rate = g =
6.60%
18.50%
7.80%
Expected dividend = D1 = D0*(1+g) =
2.95
1.80
2.00
Expected rate = r = Cost of equity =
?
?
?
Current stock price = P0 =
47.45
60.70
46.25
Flotation cost = f =
0.00
0.00
0.00
Formula for calculating the Expected rate:
r = (D1/(P0-f))+g =
12.82%
21.47%
12.12%
Company
CAPM
Constant Growth
Stocks
US Bancorp
17.04%
12.82%
Praxair
24.29%
21.47%
Eastman Kodak
8.85%
12.12%
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