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Compute the expected net distributions to stockholders

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Assume you expect a company's net income to remain stable at $2,000 for all future years, and you expect all earnings to be distributed to stockholders at the end of each year, so that common equity also remains stable for all future years (assumes clean surplus). Also, assume the company's β = 1.5, the market risk premium is 6% and the 20-year yield on risk free treasury bonds is 2%. Finally, assume the company has 1,000 shares of common stock outstanding.

Question a. Use the CAPM to estimate the company's equity cost of capital.

Question b. Compute the expected net distributions to stockholders (dividends) for each future year.

Question c. Use the dividend discount (i.e., free cash flow to equity investors) valuation model to estimate the company's current stock price.

Reference no: EM132573478

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