Question

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 capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is _________.

Answer 1

Answer:

12%

Explanation:

Dividend Valuation method is used to value the stock price of a company based on the dividend paid, its growth rate and rate of return. The price is calculated by calculating present value of future dividend payment.

Formula to calculate the value of stock

Price = Dividend / ( Rate or return - growth rate )

$84 = $3.36 / ( Required Rate of return - 8% )

$84 = $3.36 / ( Required Rate of return - 0.08 )

Required Rate of return - 0.08  = $3.36 / $84

Required Rate of return - 0.08  = 0.04

Required Rate of return = 0.04 + 0.08

Required Rate of return = 0.12 = 12%