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what is the ddm and capm for NYSE:AXP (american express) for fiscal year end 2017 and...

what is the ddm and capm for NYSE:AXP (american express) for fiscal year end 2017 and 2018?

Solutions

Expert Solution

CAPM

The CAPM i.e. Capital Asset Pricing Model is used to determine the required rate of return of an asset. It is calculated as follows:

Required Rate of Return (Ke) = Risk Free Rate(Rf) + [Beta of the Stock(b)][Return on the Market(Rm) - Risk Free Rate(Rf)]

2017

Ke = (0.0093875)+(1.04)(.1874-.0093875)

Ke = 0.1945 or 19.45%

2018

Ke = (0.019423) + (1.04)(0.0659--0.019423)

Ke = 0.0677 or 6.77%

DDM

Dividend Discount Model is used to value the price of stocks of the company based on the theory that it is the sum of all the future payments, discounted back to their present value.

2017

growth rate = retention ratio * return on equity

g = 0.81 * .3347 = 0.2711 or 27.11%

2018

g = 0.55 * 0.1365 = 0.0751 or 7.51%

In both the years since the growth rate is more than the cost of equity i.e. Ke, DDM cannot be used as the formula for DDM is:

[Dividend Paid(1+g)]/[Ke-g]

the formula will yield a negative answer.

Note: All the required financials were compiled from Yahoo Finance, for calculating the Risk-free Rate (Rf) Average Return on 3 Months US Treasury Bill was taken for the corresponding periods.

jeff jeffy answered 6 months ago
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