ABC, Inc. just paid an annual dividend (D0) of $1 per share on earnings of $2....

ABC, Inc. just paid an annual dividend (D0) of $1 per share on earnings of $2. You expect the firm’s dividends to grow at 20% over the next two years based on its expansion plans. After that you expect dividends to grow at the industry average of 7% per year. The riskfree rate is 3%, the market risk premium is 6%, and its beta is 1.2.

Using CAPM, what is the discount rate used to calculate the intrinsic value? (in percent, so 10% is 10.00, not 0.10)

Expert Solution

As per CAPM

expected return = risk-free rate + beta * (Market risk premium)

Expected return% = 3 + 1.2 * (6)

Expected return% = 10.2

jeff jeffy answered 2 years ago

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