Given the information below, use the CAPM to estimate the required rate of return for MSFT.

Return on the market portfolio (SPY) R_SPY = 9.50% (based on 25 years of historical data); the risk free rate is R_f = 3.5% (based on L-T inflation rate of 2.50% & real return of 1.0%); USE MSFT beta estimate: b = 1.05.

(10 points)

Based on past trend, lets assume MSFT will pay a dividend of $1.64 in 2017. [NOTE: This does NOT match the ValueLine sheet estimate of $1.53 for 2017!] Therefore, for simplicity lets assume that D₁ = $1.64, because it will not be fully paid until the end of Year 2017. Lets also assume that MSFT will grow its future dividends at a L-T constant rate of g = 6%. Assuming a required rate of return found in above, estimate the current value of MSFT using the Constant Growth DDM. Assume that D₁ = $1.64