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The board of directors of API, a relatively new electronics manufacturer, has decided to beginning paying a common stock dividend to increase the attractiveness of the stock in the free market. The board plans to pay $2.45 per share in the coming year (i.e., next year) and anticipates that its future dividends will increase at an annual rate consistent with that experienced over the period from 2009 - 2012 (see below). The company currently has a beta of 1.5, the rate of return for the market is expected to be 8% and the risk-free rate is currently 3%. Given this scenario, what is the current value of API's common stock? If the current market price is $48.00 per share, should you purchase this stock. Briefly, explain your answer. (HINT: This problem requires a three-part calculation, involving the CAPM & constant growth models, to solve it - FYI, all of these concepts were also covered in the prerequisite BUSI 320 course - Corporate Finance).
USE MS EXCEL TO CONDUCT YOUR CALCULATIONS, then post your spreadsheet using this link (click on "Textbook Assignment 2," above).
Year Dividend
2012 $2.32
2011 $2.21
2010 $2.10
2009 $2.00
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