Evaluate the average growth rate

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Reference no: EM1344503

We will evaluate the expect value of its stock using the Constant Growth Model (page 114): Po = D1/(r - g)

To do that we will have to estimate the vales of r, g, and D1.

To estimate the value of r we will use the Capital Asset Pricing Model:

CAPM = Rf + Beta(Rm - Rf)

Where:

Risk Free Rate = Rf = 3.5%

Market Return = Rm = 12%

Beta of BA 217 Corp. = .85

Question 1: Calculate "r".

Next we estimate the value of "g" using the average growth rate of past dividends.

Assume 6 years ago MT 217 paid a dividend of $1.20 and this year they paid a dividend of $1.55, using the Excel RATE formula evaluate the average growth rate it took for the dividend to the current level in the period of time.

Question 2: Calculate "g".

Next we estimate the value of D1, the dividend next year as required by the Constant Growth Model.

D1 = Do(1 + g), where Do = the dividend today, $1.55

Question 3: Calculate "D1".

Using your solutions estimate the value of MT 217 Corporation's stock using the Constant Growth Model.

Po = D1/(r - g)

Question 4: Evaluate the estimated value or Price Today of MT 217 = "Po".

Reference no: EM1344503

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