Zombie Manufacturing Company is expected to pay a dividend of $4.63 in the upcom

Question

Zombie Manufacturing Company is expected to pay a dividend of $4.63 in the upcoming year. Dividends are expected to grow at 6.4% per year. The risk-free rate of return is 2%, and the expected return on the market portfolio is 8.6%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth dividend discount model to determine the value of the stock. The stock's current price is $96. What is your estimate for the market capitalization rate of this asset?

Enter answer in percents to two decimal places.

Explanation / Answer

Market capitalization rate = [D1/price]+g

           =[4.63/96]+.064

           = .0482+.064

           = .1122 or 11.22%

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