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The equity beta for Microsoft Inc. is 1.11. The yield on ten-year treasuries is 3%, and...

The equity beta for Microsoft Inc. is 1.11. The yield on ten-year treasuries is 3%, and the historical returns on S&P 500 has a mean of10% and standard deviation of 11% for the pasts 3 years. The stock volatility of Microsoft is 12%. Further, it issues dividends at an annual rate of $1.84. Its current stock price is $107.71, and you expect dividends to increase at a constant rate of 5% per year. (Sow steps with calcs.)

A) Estimate Microsoft's cost of equity using both CDGM and CAPM.

B) Based on Sharpe ratio estimate, should investors buy in Microsoft or S&P 500 index? (calculate Microsoft's Sharpe ratio using both the returns of the CDGM method and the CAPM method, and compare them with the market index Sharpe Ratio. Then, draw a conclusion in which case we should choose Microsoft and in which case we pick the market index.)

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jeff jeffy answered 2 years ago
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