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EX3. Salt Lake City Inc., provides maintenance services for commercial buildings. Currently, beta on its common...

EX3. Salt Lake City Inc., provides maintenance services for commercial buildings. Currently, beta on its common stock is 1.8. The risk-free rate is now 10 percent, and the expected return on the market portfolio is 15 percent. Its January 1, and the company expected to pay a $2 per share dividend at the end of the year, and the dividend is expected to grow at a rate of 11 percent for many years to come. Based on the CAPM model and dividend growth model, what value would you place on one share of this common stock?
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Answer #1

Beta of Stock = 1.8

Risk Free Rate = 10%

Expected Return on market portfolio = 15%

Dividend at end of year = $2

Divided Growth Rate= 11%

Required Return on Stockk based on CAPM Model = Risk Free Rate + Beta *(Expected Return on Market Portfolio - Risk Free Rate)

= .1 + 1.8*(.15-.1)

= .1 + .09

= .19 or 19%

Value of Stock using Constant Div. Growth Model = Dividend at end of year / (Required Return % - Growth %)

Value of Stock = 2/(.19-.11)

Value of Stock = $25

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