There are answers for question 1, 2&4. The answers are in BOLD. I am having issu
ID: 2631437 • Letter: T
Question
There are answers for question 1, 2&4. The answers are in BOLD. I am having issues with questions 3, 5, 6, . I would really appreciate the help with these questions. Some of the questions require using some of the answers that are already provided. Please I would really appreciate the help. Thank you. Please be detailed and show all work. Thank you:-)
bj = beta coefficient for asset j, (1.75)
Rm = market return. (10%)
The equation for CAPM is kj = Rf + [bj x (Rm - Rf)]
kj = Solve for required return on asset j (kj is CAPM)
ANSWER: kj = 6% +1.75 * (10% - 6%) =13%
2. Calculate the growth rate of Asset J dividends, we have to assume that future dividend payments will grow at a constant rate into the future forever. This constant rate can be estimated by calculating the average growth rate from the past dividends. Calculate Asset J
Explanation / Answer
Let:
Dj = $ .86,
D8 = $2.00,
n = 8.
The equation for calculating the growth rate of dividends is the future value equation. FV=PV(1+i)n
where:
Dj = PV,
D8 = FV,
n = time
Growth Rate = I
The dividend growth model is based on only dividend payment policy of the company, it does not consider the earnings potential of the company. Therefore it is widely used by the small investor not by strategic investor. The model cannot be used if the growth rate is more than
required rate of return as the answer will be in negative. Moreover, it based on the assumption
that the growth will be constant in future, it cannot be used in a scenario where the rate of growth is not constant. However, if the growth rate is not constant for a specific period of year, but then it becomes constant, in the situation the price can be determined by using the discounted the dividend and future expected value of share when it becomes constant. The model does not consider all risk, it means that if the company is paying dividend in current year but will not earn in future, the price will be distorting under this method. It cannot be used for a company which is not paying dividend. Under this method the required rate of return increase when there is increase in growth rate, if the growth increases by 1%, the required rate of return or cost of equity also increases by 1%.
The dividend growth model is based on only dividend payment policy of the company, it does not consider the earnings potential of the company. Therefore it is widely used by the small investor not by strategic investor. The model cannot be used if the growth rate is more than
required rate of return as the answer will be in negative. Moreover, it based on the assumption
that the growth will be constant in future, it cannot be used in a scenario where the rate of growth is not constant. However, if the growth rate is not constant for a specific period of year, but then it becomes constant, in the situation the price can be determined by using the discounted the dividend and future expected value of share when it becomes constant. The model does not consider all risk, it means that if the company is paying dividend in current year but will not earn in future, the price will be distorting under this method. It cannot be used for a company which is not paying dividend. Under this method the required rate of return increase when there is increase in growth rate, if the growth increases by 1%, the required rate of return or cost of equity also increases by 1%.
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