You have assigned the following values to these three firms Growth Beta 7.20 % 1

Question

You have assigned the following values to these three firms Growth Beta 7.20 % 1.76 3.14 1.19 Price Upcoming Diidend US Bancorp Praxair Eastman Kodak $1.90 1.65 2.00 $ 39.30 35.55 38.10 13.00 5.50 Assume that the market portfolio will earn 15.20 percent and the risk-free rate is 8.00 percent. Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places.) CAPM Constant-growth model US Bancorp required return Praxair required return Eastman Kodak required return

Explanation / Answer

CAPM : required return = risk free rate + beta(market rate - risk free rate)

Constant growth model : Growth rate + Upcoming dividend* / current price

* assumed that upcoming dividend includes the growth rate and it is the next dividend

CAPM Constant growth model US bancorp 20.67% = (0.08+1.76(0.1520-0.08)) 12.03% = (0.072 + (1.9/39.3)) Praxair 30.61% 17.64% Eastman kodak 16.57% 10.75%

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