Homework Answers
| According to the dividend growth model, the price | ||||||
| of a stock that has a constant dividend with no growth | ||||||
| P0 = D1/R | ||||||
| where P0 = Price of a stock that has a constant dividend with no growth | ||||||
| D1 is the dividend at the end of the first period that is $3.00. | ||||||
| R is the discount rate that is .07. | ||||||
| P0 = 3/.07 | ||||||
| P0 = 42.85714. | ||||||
| The inherent value of one share of procter and gamble is $42.86. | ||||||
| Under the Capital Asset pricing model | ||||||
| Rs = Rf + Beta*(Rm-Rf) | ||||||
| Rs is the expected return on the security that is 7%. | ||||||
| where Rf is the risk free rate that is 2.50%. | ||||||
| Rm - Rf = market risk premium | ||||||
| Beta = 1.10 | ||||||
| .07 = .0250 + 1.10*(market risk premium) | ||||||
| market risk premium = (.07 - .0250)/1.10 | ||||||
| market risk premium = (.045)/1.10 | ||||||
| market risk premium = .040909. | ||||||
| The Market risk premium is 4.09%. | ||||||
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