Valuation of stock using CAPM.
Cargo Point, Inc. has a beta of 1.10. The risk-free rate of interest is currently 6%, and the required return on the market portfolio is 13%. The company plans to pay a dividend of $2.91 in the coming year and anticipates that its future dividends will increase at an annual rate consistent with that of the 2003-2005 period:
|
Year
|
Dividend
|
|
2005
|
$2.67
|
|
2004
|
$2.45
|
|
2003
|
$2.25
|
Estimate the value of Cargo Point, Inc. stock.
Required Rate of Return
Kb = Rf + b(Km - Rf)
|
Kb
|
Rate of Return
|
|
|
Rf
|
Rate of return on risk free securities
|
|
|
Km
|
rate of return on market portfolio
|
|
|
b
|
beta
|
|
|
Km - Rf
|
Risk Premium
|
|
|
Kb
|
|
|
|
Rf
|
|
6%
|
|
Km
|
|
13%
|
|
b
|
|
1.1
|
|
Km-Rf
|
|
|
|
Required rate of return
|
|
|
|
Km - Kf
|
|
0.07
|
|
b(Km - Kf)
|
|
0.077
|
|
Rf + b (Km - Rf)
|
|
13.70%
|
|
Share Valuation
|
|
Po
|
|
Net proceeds / Current Market Price
|
|
D1
|
$2.91
|
Expected dividend per share
|
|
Ke
|
13.70%
|
Rate of return
|
|
g
|
9%
|
Growth rate
|
|
Po
|
D / (Ke - g)
|
|
Ke-g
|
0.047
|
|
Po
|
$61.91
|