Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalisation rate, and the constant growth DDM to determine the value of the shares. The share is currently priced at $84.00. Using the constant growth DDM, the market capitalisation rate is ________.

Question

Quizplus · Accepted Answer

Using the constant growth DDM, we can determine the market capitalisation rate as follows:

Market capitalisation rate = (Dividend / Price) + Growth rate 
= (3.36 / 84) + 8% 
= 12%

Therefore, the correct answer is B) 12%.

Cache Creek Manufacturing Company Is Expected to Pay a Dividend