Question

You have assigned the following values to these three firms: Price Upcoming Dividend Growth BetaEstee Lauder $50.00 $1.70 16.50% 0.74Kimco Realty 82.00 1.68 11.00 1.51Nordstrom 10.00 0.60 13.00 1.02Assume that the market portfolio will earn 10.00 percent and the risk-free rate is 4.00 percent. Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places and do not include a % symbol.)CAPM Constant-Growth Model
Estee Lauder required return ____.__% ____.__%
Kimco Realty required return ____.__% ____.__%
Nordstrom required return ____.__% ____.__%

Answer 1

Answer and Explanation:

The formula to compute the required rate of return using the CAPM and constant growth model is as follows

Under CAPM

The Required rate of return = Risk-free rate of return + Beta × (Market rate of return - risk-free rate of return)

Constant growth model = Dividend ÷ Price + Growth rate

For Estee lauder,

Under CAPM = 4% + 0.74 × (10% - 4%)

= 4% + 0.74 × 6%

= 4% + 4.44%

= 8.44%

Under the Constant growth model

= $1.70 ÷ $50 + 16.50%

= 19.90%

For Kimco realty,

Under CAPM = 4% + 1.51 × (10% - 4%)

= 4% + 1.51 × 6%

= 4% + 9.06%

= 13.06%

Under the Constant growth model

= $1.68 ÷ $82 + 11%

= 13.05%

For Estee lauder,

Under CAPM = 4% + 1.02× (10% - 4%)

= 4% + 1.02 × 6%

= 4% + 6.12%

= 10.12%

Under the Constant growth model

= $0.60 ÷ $10 + 13%

= 19.00%