You are considering buying shares in Chattanooga Railways. The stock is currently trading for $20. Analysts expect the next annual dividend to be $0.90. (The next dividend will be paid in one year.) Dividends are expected to grow in perpetuity at the annual rate of 3%. Chattanooga's beta is 0.857. The risk-free rate is 2% and the expected return on the market is 9%. Use this information to answer the questions that follow.

 1. What annual return will you earn on Chattanooga if you buy it today, hold it, and receive the perpetual stream of growing dividends?

2. Under the CAPM, what is the equilibrium rate of return on Chattanooga's shares given its systematic risk?

Answer rating: 100% (QA)

To answer these questions well use the Gordon Growth Model also known as the GordonShapiro Model to ... View the full answer