Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the
ID: 2727135 • Letter: C
Question
Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%, Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant growth DDM, the market capitalization rate is_. 9% 12% 14% 18% Grott and perrin, Inc., has expected earnings of $3 per share for next year. The firm's ROE 20%, and its earnings retention ratio is 70%, If the firm's market capitalization rate is 15% what is present value of its growth opportunities? $20 $70 $90 $115 Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 4%, and expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate on the stock and use the constant growth DDM to determine the intrinsic value of the stock. The stock is trading in the market today at $84. Using the constant growth DDM and the CAPM, the beta of the stock is_. 1.4 0.9 0.8 0.5 Lifecycle Motorcycle Company is expected to pay a divided in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 7% per year. An appropriate required return for the stock is 12%, Using the multistage DDM, the stock should be worth today. $63.80 $65.13 $67.95 $85.60Explanation / Answer
5) P0 = D1/Ke-g
84 = 3.36/Ke-0.08
Ke-0.08 = 0.04
Ke = 0.12
Ke = 12%
6) G =b*r
= 0.70*0.20
= 0.14
D1 = 3*0.30
= 0.9
P0 = D1/Ke-g
= 0.9/0.15-0.14
= $90
7) P0 = D1/Ke-g
84 = 4.20/Ke-0.08
Ke-0.08 = 0.05
Ke = 0.13
Ke = 13%
CAPM return = Rf+Beta(Rm-Rf)
13 = 4+ Beta (14-4)
9 = 10Beta
Beta =0.90
8)
P3 = C3/ke-g
4(1.07)/0.12-0.07
85.60
Year
Cash flow
PVF@12%
Present value'
1
2
0.892857143
1.79
2
3
0.797193878
2.39
3
4
0.711780248
2.85
P3
85.60
0.711780248
60.93
67.95
P3 = C3/ke-g
4(1.07)/0.12-0.07
85.60