Expected Rate of Return and Constant Growth Model

Use the CAPM to calculate the Expect Rate of Return = “r”

Based on the assumptions that:

Risk Free Rate = 3.50% Rf
Market Return = 12.00% Rm

We found the Beta of AB 217 Corp = 0.85
SO
CAPM = Rf + Beta(RM – Rf) r = Question 1

This will be the “r” value that is used in the CGM.

Estimate the value of “g” … the constant growth rate ..

Calculate the Dividend Growth Rate of AB 217 for Constant Growth Model (CGM)
We use actuall AB 217 history

PV ($1.20) Dividend paid 6 years ago. Negative so Excel can do the math
FV $1.55 Dividend paid this year = Do)
n 6
PMT 0
Rate This will be the Dividend Growth Rate … = g Question 2

Constant Growth Model

Estimate the value of AB 217 stock using the CGM

D1 = Question 3

Po = #DIV/0! Question 4

1. CAPM = r = Rf + Beta(Rm-Rf) = 0.035 + 0.85(0.12-0.035) = …

The expected rate of return and constant growth models are examined. The risk free rate are provided.