The current risk-free rate is 2.5%. The market risk premium is 5%. If CC\'s mark

Question

The current risk-free rate is 2.5%. The market risk premium is 5%. If CC's market beta is 1.5,

CC is expected to grow at a long-run steady-state growth rate of 2% in its comprehensive net income from year+5 onwards. Based on the clean surplus accouting, what will be the forecasted dividend for year+6 to be used in numerator of continuing value calcuation at year+5.

Actual Projected 2015 Year +1 Year +2 Year +3 Year +4 Year +5 Comprehensive Income $13,696 $27,990 $30,048 $32,252 $34,612 $37,138 Common Shareholders’ Equity: Paid-In Capital $8,626 $9,488 $10,438 $11,482 $12,630 $13,892 Retained Earnings 127,320 137,384 154,036 161,914 187,910 194,048 Accumulated Other Comprehensive Income               (5,376)           (5,376)           (5,376)           (5,376)           (5,376)           (5,376) Total Common Equity $130,570 $141,496 $159,098 $168,020 $195,164 $202,564

Explanation / Answer

1)Answer (C) 10%

Calculation of required rate of return using CAPM Approach :

           Required rate of return = risk free rate + beta*market risk premium

                                            = 2.5%+1.5*5%

                                            = 10%

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