1 answer

Question two - problem solving questions (55 points) Part I: Real Co. just paid a dividend...

Question:

Question two - problem solving questions (55 points) Part I: Real Co. just paid a dividend of $1.40. Its stock has a required
Question two - problem solving questions (55 points) Part I: Real Co. just paid a dividend of $1.40. Its stock has a required rate of return, 15%, and investors expect the dividend to grow at a constant 12% rate in the future. (a) What is the stocks' intrinsic values? (20 points) (b) How much would be the dividend at year 4? (15 points) Part II: Swiss Creative Technology Company has a beta of 1.40. The risk- free rate of return is 1.60 percent and the market rate of return is 6.40 percent. What is the CAPM cost of equity? (20 points)

Answers

Answer to Part I:

Last Dividend, D0 = $1.40
Growth Rate, g = 12%
Required Return, rs = 15%

Requirement (a):

D1 = D0 * (1 + g)
D1 = $1.40 * 1.12
D1 = $1.5680

P0 = D1 / (rs - g)
P0 = $1.5680 / (0.15 - 0.12)
P0 = $1.5680 / 0.03
P0 = $52.27

Intrinsic Value, P0 = $52.27

Requirement (b):

D4 = D0 * (1 + g)^4
D4 = $1.40 * 1.12^4
D4 = $1.40 * 1.57351936
D4 = $2.20

Dividend in Year 4, D4 = $2.20

Answer to Part II:

Cost of Equity = Risk-free Rate + Beta * (Market Return - Risk-free Rate)
Cost of Equity = 1.60% + 1.40 * (6.40% - 1.60%)
Cost of Equity = 1.60% + 1.40 * 4.80%
Cost of Equity = 8.32%

.

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