Valuation of stock using capm

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Reference no: EM1316183

Valuation of stock using CAPM.

Cargo Point, Inc. has a beta of 1.10. The risk-free rate of interest is currently 6%, and the required return on the market portfolio is 13%. The company plans to pay a dividend of $2.91 in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that of the 2003-2005 period:

Year	Dividend
2005	$2.67
2004	$2.45
2003	$2.25

Estimate the value of Cargo Point, Inc. stock.

Required Rate of Return

Kb = Rf + b(Km - Rf)

Kb	Rate of Return
Rf	Rate of return on risk free securities
Km	rate of return on market portfolio
b	beta
Km - Rf	Risk Premium
Kb
Rf		6%
Km		13%
b		1.1
Km-Rf
Required rate of return
Km - Kf		0.07
b(Km - Kf)		0.077
Rf + b (Km - Rf)		13.70%

Share Valuation
Po		Net proceeds / Current Market Price
D1	$2.91	Expected dividend per share
Ke	13.70%	Rate of return
g	9%	Growth rate

Po	D / (Ke - g)
Ke-g	0.047
Po	$61.91

Reference no: EM1316183

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