Question

You have assigned the following values to these three firms:

Estee Lauder - Price = $44.00, Upcoming Dividend = $2.00, Growth = 6.90%, and Beta = 1.06

Kimco Realty - Price = $58.00, Upcoming Dividend = $1.46, Growth = 4.00%, and Beta = 1.48

Norstrom - Price = $13.00, Upcoming Dividend = $2.00, Growth = 9.00%, and Beta = 1.70

Assume that the market portfolio will earn 12.40 percent and the risk-free rate is 3.40 percent. Compute the required return for each company using both CAPM and the constant-growth model. (CAPM and constant-growth model answers for each of the 3 companies above).

Answer 1

Answer: Calculation of Required Rate of Retum ( Using CAPM) Required Rate of Return = Risk Free Return + Beta (Market Rerurn-Risk Free Return) Estee Lauder = 3.40+ 1.05 (12.40-3.40) = 3.40+ 9.54 = 12.94 % Kimco Realty = = 3.40+ 3.40+ 16.72 % 1.48 (12.40-3.40) 13.32 Norstrom = 3.40+ 3.40+ 1.70 (12.40-3.40) 15.30 Calculation of Required Rate of Retum ( Using Constant Growth Model) For Estee Lauder: Price of Share - Upcoming Dividend Required Rate of Return-Growth Rate 544 = _ Required Rate of Return - 0.069 Required Rate of Return 2 + 0.059 Required Rate of Return Required Rate of Retum 0.045455+ 0.059 0.114455 or 11.45% For Kimco Realty: Price of Share = Upcoming Dividend Required Rate of Return-Growth Rate $1.45 Required Rate of Return-0.040 Required Rate of Returns - 1.45 + 0.040 55 Required Rate of Return= 0.025172 + 0.040 Required Rate of Retum = 0.06517 or 6.52% For Norstrom: Price of Share = Upcoming Dividend Required Rate of Return-Growth Rate 513 = $2.00 Required Rate of Return-0.090 Required Rate of Return = - * 0.090 Required Rate of Retum= 0.153845 + 0.090 Required Rate of Retum= 0.24385 o 24.29%