|
State
|
Probability
|
Firm A
|
Firm B
|
Portfolio
|
|
Recession
|
.1
|
-15%
|
-2%
|
|
|
Normal
|
.6
|
9%
|
3%
|
|
|
Boom
|
.3
|
12%
|
18%
|
|
|
Beta
|
|
1.1
|
1.6
|
|
Assume Firm A just paid a dividend of $2.40 yesterday. Dividend growth is projected to be 5%.
Use Firm A's CAPM required return and the dividend growth model to calculate the intrinsic value of a share of Firm A stock.
Assume the risk-free rate is 4% and the market rate of return is 9.5%