using capms formulareturn on equity risk-free

Question

Using CAPM's formula,

Return on equity = Risk-free rate + Beta*(Expected market return - risk-free rate)

With the given information,

Return on equity = 1% + 1.7*(9% - 1%) = 14.60%

Hence SuperSoft stock's expected return on the projected investment is 14.60%. With the DDM formula,

P₀ = D₁/(K_e - g)

With the given information and that calculated using CAPM,

$100 = $1/(14.60% - g)

14.60% - g = 1%

g = 14.60% - 1%

g = 13.60%

Thus the implied growth rate for this stock is 13.6%