Praxair's upcoming dividend is expected to be $2.25 and its stock is selling at $65. The firm has a beta of 0.8 and is expected to grow at 10 percent for the foreseeable future. Compute Praxair's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 10 percent and the risk-free rate is 3 percent.
A) CAPM: 8.6 percent; Constant Growth Model: 13.46 percent
B) CAPM: 9.7 percent; Constant Growth Model: 12.56 percent
C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent
D) CAPM: 8.2 percent; Constant Growth Model: 9.56 percent

Question

Quizplus · Accepted Answer

CAPM: Required return = Risk-free rate + Beta * (Market return - Risk-free rate)= 3% + 0.8 * (10% - 3%)= 3% + 0.8 * 7%= 3% + 5.6%= 8.6%Constant Growth Model: Required return = Dividend yield + Growth rate= $2.25 / $65 + 10%= 3.46% + 10%= 13.46%

Praxair's Upcoming Dividend Is Expected to Be $2