Price Upcoming Dividend Growth Beta US Bancorp $ 36.55 $ 1.60 10.0 % 1.8 Praxair

Question

Price Upcoming Dividend Growth Beta US Bancorp $ 36.55 $ 1.60 10.0 % 1.8 Praxair 64.75 1.12 11.0 2.4 Eastman Kodak 24.95 1.00 4.5 0.5 Assume that the market portfolio will earn 12 percent and the risk-free rate is 3.5 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 US Bancorp required return % % Praxair required return % % Eastman Kodak required return % %

Explanation / Answer

Bancorp =

CAPM : Required return = rf + Beta (market return - rf) = 3.5% + 1.8 (12%-3.5%) = 18.80%

constant-growth model : Value of stock = Dividend / Required return - g

=> 36.55 = 1.60 / R - 0.10 Now solving for R, we get R = 14.38%

Praxair =

CAPM : Required return = rf + Beta (market return - rf) = 3.5% + 2.4 (12%-3.5%) = 23.90%

constant-growth model : Value of stock = Dividend / Required return - g

=> 64.75 = 1.12 / R - 0.11 Now solving for R, we get R = 12.73%

Eastman Kodak =

CAPM : Required return = rf + Beta (market return - rf) = 3.5% + 0.5 (12%-3.5%) = 7.75%

constant-growth model : Value of stock = Dividend / Required return - g

=> 24.95 = 1.00 / R - 0.045 Now solving for R, we get R = 8.51%

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