Integrative-Risk and valuation Giant Enterprises has a beta of 1.20, the risk-free rate of return is currently

Question:

Integrative-Risk and valuation Giant Enterprises has a beta of 1.20, the risk-free rate of return is currently 10 percent, and the market return is 14 percent. The company, which plans to pay a dividend of US$2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2006-2012 period, when the following dividends were paid.
Year......................Dividend per share
2012..................................US$2.45
2011.......................................2.28
2010.......................................2.10
2009........................................1.95
2008........................................1.82
2007........................................1.80
2006........................................1.73
a. Use the capital asset pricing model (CAPM) to determine the required return on Giant's stock.
b. Using the constant-growth model and your finding in part a, estimate the value of Giant's stock.
c. Explain what effect, if any, a decrease in beta would have on the value of Giant's stock.
Capital Asset Pricing Model
The Capital Asset Pricing Model (CAPM) describes the relationship between systematic risk and expected return for assets, particularly stocks. The CAPM is a model for pricing an individual security or portfolio. For individual securities, we make use of the security market line (SML) and its...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Principles of Managerial Finance

ISBN: 978-1408271582

Arab World Edition

Authors: Lawrence J. Gitman, Chad J. Zutter, Wajeeh Elali, Amer Al Roubaix

Question Posted: