Question

You have assigned the following values to these three firms: Price Upcoming Dividend Growth Beta Estee Lauder $ 51.00 $ 0.80 16.00 % 0.65 Kimco Realty 56.00 1.43 11.00 1.60 Nordstrom 6.50 0.40 13.00 1.71 Assume that the market portfolio will earn 15.00 percent and the risk-free rate is 8.50 percent. Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

Answer 1

CAPM Return = Risk free return + Beta * ( Market return - Risk free return )

According to the constant growth model , Required rate of return = (Upcoming dividend / Stock price ) + growth rate

For Estee Lauder :

CAPM return : Risk free return + Beta * ( Market return - Risk free return )

= 8.5 + 0.65 * (15 - 8.5 )

= 12.73 %

Constant growth return = (Upcoming dividend / Stock price ) + growth rate

= (0.8 / 51) + 0.16

= 0.1757 or 17.57 %

For Kimco Realty :

CAPM return : Risk free return + Beta * ( Market return - Risk free return )

= 8.5 + 1.6* (15 - 8.5 )

= 18.90 %

Constant growth return = (Upcoming dividend / Stock price ) + growth rate

= (1.43/ 56) + 0.11

= 0.1355 or 13.55 %

For Nordstrom  :

CAPM return: Risk free return + Beta * ( Market return - Risk free return )

= 8.5 + 1.71* (15 - 8.5 )

= 19.62 %

Constant growth return = (Upcoming dividend / Stock price ) + growth rate

= (0.4/ 6.50) + 0.13

= 0.1915 or 19.15 %