Question

Assume a major investment service has just given Oasis Electronics its highest investment​ rating, along with a strong buy recommendation. As a​ result, you decide to take a look for yourself and to place a value on the​ company's stock. ​Here's what you​ find: This​ year, Oasis paid its stockholders an annual dividend of ​$2.31 a share but because of its high rate of growth in earnings, dividends are expected to grow at a rate of 12 % a year for the next for years and then level out at 9% a year. So far you've learned that the stock has a beta of 1.95, the risk free rate of return is 6%, and the expected return on the market is 11%. Using the CAPM to find the required rate of return, put a value on this stock.

A. Using the CAPM the required rate of return on the investment is?

B. The value of the company's stock is $. ( Round to the nearest cent).

Answer 1

A. The required return as per the CAPM Model is :

Re = Rf + beta (Rm - Rf)

= 6 + 1.95 ( 11 - 6)

= 15.75%

B. The value of company stock is :

D0 = $2.31

D1= $2.5872

D2 = $2.8977

D3 = $3.2454

D4 = $3.6348

D5 = $3.9619

P4 = D5/ Re - g

= $3.9619/ 0.1575 - 0.09

= $3.9619/ 0.0675

= $58.6948

So, the current value is :

= $2.5872 /1.1575^1 + 2.8977/1.1575^2 + 3.2454/1.1575^3 + (3.6348 + 58.6948)/1.1575^4

= $41.2131

= $41 (rounded off to nearest cents)

SO, the current share price is $41.