Question

Select two stocks that have been paying dividends for at least 5 years. First, obtain dividend payout from Yahoo Finance; second, estimate the betas of the stocks and then use CAPM to estimate the required rate of return; third, obtain ROE and plow back ratio from Yahoo Finance to calculate dividend growth rate; fourth, using the DDM to calculate the price of the stocks.

Answer 1

We select "Boeing" and "Walmart"

Boeing:

Dividend payout ratio = 42.29%

Beta= 1.71

CAPM return = Rf + beta*(Rm-Rf). We take Rf as the risk free return = 2.8% and Rm =19.70%(dow last year return)

CAPM return = 2.8+1.71*(19.70-2.8) = 31.699%

ROE = 52.9%

Ploughback = 1-payout = 0.5771

g = ROE = B = -0.529*0.5771 = 0.3053 = 30.53%

D0 =5.97

Price = D1/(r-g) =5.97*1.3058/(0.31699-0.3058) = $689.04 (theortical rice)

Walmart:

Dividend Payout = 62.20%

Beta= 0.46

CAPM return = Rf + beta*(Rm-Rf). We take Rf as the risk free return = 2.8% and Rm =19.70% (Dow, last year return)

CAPM return = 2.8+0.46*(19.70-2.8) =10.57%

ROE = 13.04%

Ploughback = 1- dividend payout = 1-0.622 = 0.378

g =0.1304*0.378 =0.0493 =4.93%

D0 =2.05, D1 = 2.05*1.0493 = $2.15

Price = D1/(r-g) = 2.15/(0.1057-0.0493) = $38.12