Reference no: EM132879119

Umbrella firm Umbrella just paid an annual dividend of $ 1.32 per common share. The Beta (ß) of the common stock of this firm is 1.10, the expected return in the market is 10.50% and the risk-free rate is 2%.

Analysts estimate that the dividend growth rate for the next 3 years will follow the historical growth of recent dividends:

Div. at t = -4 = $ 1.04

Div. at t = -3 = $ 1.09

Div. at t = -2 = $ 1.16

Div. at t = -1 = $ 1.22

Div. at t = 0 = $ 1.32

After these 3 years of projections, the dividend will grow by 2.5%, in perpetuity.

Problem 1) Calculate the expected growth rate of the dividend for the next 3 years.

Problem 2) Represent the analysis of the situation with a timeline, identifying the dividends required for the valuation of the share as of today.

Problem 3) What is the rate of return required by the market on Outdoors stock in CAPM function?

Problem 4) At what price should you normally buy Outdoors stock today if the required yield is determined by CAPM (or CAPM)?

Problem 5) You buy the stock today for $ 17 and sell it for $ 20 after you received 3 dividends (resale just after the 3rd dividend). What is the yield realized on your investment, expressed as an annual effective rate?