Question

10-30 Required Return Using the information in the table, compute the required return for each company using both CAPM and the constant growth model. Compare and discuss the results. Assume that the market portfolio will earn 11 percent and the risk-free rate is 4 percent. (LG10-3, LG10-7) Price Growth Beta Estee Lauder Kimco Realty Nordstrom Upcoming Dividend $0.60 1.54 0.50 $47.40 52.10 5.25 0.75 11.7% 8.0 14.6 7 10-31 Spreadsheet Prohl

Answer 1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

B / C D E F G H Market return Risk free rate 11% 4% . Required Return(CAPM) Required Return (DDM) Estee Lauder Kimco Realty Nordstrom Upcoming Price Dividend $47.40 $0.60 $52.100 $1.54 $5.25 $0.50 Growth 11.70% 8.00% 14.60% Beta 0.75 1.3 2.2 9.25% 13.10% 19.40% 12.97% 10.96% 24.12% Conclusion: Estee Lauder Kimco Realty Nordstrom under priced over priced under priced Because investor's expected return is greater than required return Because investor's expected return is less than required return B ecause investor's expected return is greater than required return

Cell reference -

A 0.11 Market return Risk free rate 0.04 Required Return(CAPM) Required Return (DDM) Price Estee Lauder Kimco Realty Nordstrom 47.4 52.1 5.25 Upcoming Dividend 0.6 1.54 0.5 Growth 0.117 0.08 0.146 Beta 0.75 1.3 2.2 =$C$3+F6*($C$2-$C$3) =D6/C6+E6 =$C$3+F7*($C$2-$C$3) =D7/07+E7 =$C$3+F8*($C$2-$C$3) =D8/C8+E8 Conclusion: Estee Lauder Kimco Realty Nordstrom under priced over priced under priced Because investor's expected return is greater than required return Because investor's expected return is less than required return Because investor's expected return is greater than required return 13 15

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.