### Valuation of stock using capm

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##### Reference no: EM1316183

Valuation of stock using CAPM.

Cargo Point, Inc. has a beta of 1.10. The risk-free rate of interest is currently 6%, and the required return on the market portfolio is 13%. The company plans to pay a dividend of \$2.91 in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that of the 2003-2005 period:

 Year Dividend 2005 \$2.67 2004 \$2.45 2003 \$2.25

Estimate the value of Cargo Point, Inc. stock.

Required Rate of Return

Kb = Rf + b(Km - Rf)

 Kb Rate of Return Rf Rate of return on risk free securities Km rate of return on market portfolio b beta Km - Rf Risk Premium Kb Rf 6% Km 13% b 1.1 Km-Rf Required rate of return Km - Kf 0.07 b(Km - Kf) 0.077 Rf + b (Km - Rf) 13.70%

 Share Valuation Po Net proceeds / Current Market Price D1 \$2.91 Expected dividend per share Ke 13.70% Rate of return g 9% Growth rate

 Po D / (Ke - g) Ke-g 0.047 Po \$61.91

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