Question

Carpenter Corporation has a beta of 1.3. The expected market return is 14%, and the risk-free rate is 6%. The most recent annual dividend for Carpenter was $6.26 per share and sales grew by 4% last year. It is expected that dividends grow in same way as sales. What is your best estimation for the Carpenter Corporation’s stock price?

Answer 1

D0	6.26
For the first two years
g	0.04
D1	6.26*(1+.04)
D1	6.5104
According to the dividend growth model.
P0 = D1/(R-g)
D1 is the dividend in year 1
g is the growth rate of the dividend
R is the cost of equity or the required return on the stock.
Use the CAPM model to find the required return on the stock.
Under the Capital Asset pricing model
R = Rf + Beta*(Rm-Rf)
Rf is the risk free rate that is .06.
Beta of the stock is 1.3.
Rm is the expected return on the market that is .14.
Rm - Rf is the market risk premium that is .08.
R = .06 + (1.3*.08)
R = .164
In other words the required return on the stock is 16.4%.
P0	6.5104/(.164 - .04)
P0	52.503
The estimate of the stocks current price is equal to $52.50.