Info from problem 5: NextEra Energy (NEE) is expected to pay a dividend of $5.60 this year (2020) according to Yahoo!Finance. Earnings and dividends per share are expected to grow at a 3.0% over the next five years and your best guess is that this growth rate will continue indefinitely. NEEs beta is 0.22, the expected return on the market is estimated at 11.0%, and the risk free rate is 3.5%. Use the CAPM to estimate the fair required return for NEE, and then value the stock using the constant growth DVM. Assuming that NextEras stock is currently selling for $280.50 per share, would you consider it to be a good buy at present? You may assume it is the beginning of the year in 2020.

CAPM = risk free return + beta (market return risk free return)

CAPM= 3.5 + 0.22 (11 3.5)

CAPM = 5.15%

Value of stock= dividend next year/ (rate of equity growth rate)

Value of stock = 5.60 / (0.0515 0.030)

Value of stock = 5.60/ 0.0215

Value of stock = $260.47

No because the value of the stock is less than the market value investors will not see this as a good opportunity.

Question:

Assume the same information for NextEra Energy as in problem 5 (except for the growth rate), and also assume that NextEra Energy is selling for $280.50 per share. Calculate the constant growth rate in eps and dps that must continue in the future for NEE to be priced fairly at present.