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.