Cache Creek Manufacturing Company is expected to pay a dividend of $4.20 in the upcoming year.Dividends are expected to grow at the rate of 8% per year.The riskfree rate of return is 4% and the expected return on the market portfolio is 14%.Investors use the CAPM to compute the market capitalization rate on the stock,and the constant growth DDM to determine the intrinsic value of the stock.The stock is trading in the market today at $84.00.Using the constant growth DDM and the CAPM,the beta of the stock is _________.

Question

Quizplus · Accepted Answer

We can use the constant growth DDM formula to find the expected return on the stock.

Expected Return = (Dividend/Price) + Growth Rate
Expected Return = ($4.20/$84.00) + 8%
Expected Return = 13%

We can then use the CAPM formula to find the market capitalization rate.

Market Capitalization Rate = Riskfree Rate + Beta*(Expected Market Return - Riskfree Rate)
13% = 4% + Beta*(14% - 4%)
Beta = 0.9

Therefore, the best choice is B, 0.9.

Cache Creek Manufacturing Company Is Expected to Pay a Dividend