You have assigned the following values to these three firms: Price Upcoming Divi

Question

You have assigned the following values to these three firms:


Price Upcoming Dividend Growth Beta


Estee Lauder $37.00 $1.60 12.00% 0.99
Kimco Realty 65.00 1.81 14.00 1.82
Nordstrom 6.80 0.70 5.00 1.61

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Assume that the market portfolio will earn 10.10 percent and the risk-free rate is 2.10 percent.

Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places.)


CAPM Constant-growth model
Estee Lauder required return % %
Kimco Realty required return % %
Nordstrom required return % %

Explanation / Answer

CAPM model Estee Lauder required return =2.1%+0.99*(10.10%-2.1%)=10.02% Kimco Realty required return =2.1%+1.82*(10.10%-2.1%) =16.66% Nordstrom required return =2.1%+1.61*(10.10%-2.1%) = 14.98% Constant-growth model Estee Lauder required return =$1.60/$37.00 +12.00% =16.32% Kimco Realty required return =1.81/65 +14% = 16.785% Nordstrom required return =0.70/6.8 +5% =15.29%

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