a) Caterpillar Inc. (CAT) stock currently (2015) pays $0.77 per share quarterly
ID: 2760247 • Letter: A
Question
a) Caterpillar Inc. (CAT) stock currently (2015) pays $0.77 per share quarterly dividend (the dividend was $0.42 per share in 2008). Assuming constant growth, what is the growth rate on the CAT stock dividend?
b) Find the beta for CAT stock, and the current interest rate on 6-month T-bill.
c)For the past 5 years, the Dow Jones Industrial Average went from 12,380.05 to 17,576.96. Assume it represents the expected return for the market portfolio, calculated the expected return for CAT stock based on CAPM?
d) Based the closing price of CAT stock on 4/08/16, what is the yield of CAT stock? Is this stock over-priced or underpriced?
Explanation / Answer
A.FV is 0.77, PV is 0.42 , Nis 4×7= 28 , growth rate is 8.75%.
B.Beta for stock is 1.23, Tbill rate is 0.35%.which is risk free rate.
C.Return on market is (17,576.96 - 12,380.05)/(12,380.05) = 8.4% annually.
As per capm Return = Rf +Beta*(Rm -Rf) = 0.35% + 1.23×(8.4%-0.35%) =10.25%
D.closing price is 74.17, divedend is 0.77×4 = 3.08, yield is 3.08/74.17 = 4.15%
Its underpriced, its price is expected to increase as its generates huge cash from business.
Also its divedend yield is higher compared to peers.
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