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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
6%
13%
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
Rate of return
g
9%
Growth rate
D / (Ke - g)
Ke-g
0.047
$61.91
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