Question

You have assigned the following values to these three firms: US Bancorp Praxair Eastman Kodak Price $54.65 67.90 32.60 Upcoming Dividend $2.95 1.71 1.00 Growth 9.40% 11.50 14.50 Beta 1.68 2.43 1.17 Assume that the market portfolio will earn 12.90 percent and the risk-free rate is 5.70 percent. Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places.) CAPM US Bancorp required return Praxair required return Eastman Kodak required return Constant- Growth Model 14.80 % 14.01 % 17.57 %

Answer 1

|САРМ US Bancorp 17.80% Praxiar 23.20% Eastman Kodak 14.12% Constant dividend growth 14.80% 14.02% 1453.07%

US Bancorp Praxiar Eastman Kodak CAPM =0.057+(1.68*(0.129-0.057)) |=0.057+(2.43*(0.129-0.057)) =0.057+(1.17*(0.129-0.057)) Constant dividend growth = 2.95/54.65+0.094 1=1.71/67.9+0.115 =1/32.6+14.5