Giant Enterprise has a beta of 1.20, the risk-free rate of return is currently 10%, and the
Question:
Giant Enterprise has a beta of 1.20, the risk-free rate of return is currently 10%, and the market return is 14%. The company which plans to pay a dividend of $2.60 per share in the coming year, anticipates that its future dividends will increase at an annual rare consistent with that experienced over the 2003—2009 period, when the following dividends were paid:
Year..........Dividend per share
2009 ............$2.45
2008 ............ 2.28
2007 ............ 240
2006 ............ 1.95
2005 ............. 1.82
2004 ............. 1.80
2003 ............. 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.
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...
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Principles of managerial finance
ISBN: 978-0132479547
12th edition
Authors: Lawrence J Gitman, Chad J Zutter