11UIUC%20FIN%20300%20CAPM%20DDM%20Practice%20Problems%20SP10%20v1

# 11UIUC%20FIN%20300%20CAPM%20DDM%20Practice%20Problems%20SP10%20v1

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UNIVERSITY OF ILLINOIS College of Business - Department of Finance - Finance 300 (Financial Markets) Professor James Jackson Investment Analysis Using Market Returns and Fair Value What is the Market Required Rate of Return of the Following Stocks Based on the CAPM Model? Based on the CAPM model the market required rate of return of Stock A equals k = R (f) + β * [R m -R (f) ] k = .065 + 1.0500 * [0.19 - .065] = 0.19625 Stock # R (f) R m R m -R (f) β β * [R m -R (f) ] k = R (f) + β * [R m -R (f) ] A 0.065 0.19 0.1250 1.0500 0.1313 0.19625 B 0.03 0.17 0.1400 0.3900 0.0546 0.0846 C 0.041 0.14 0.0990 0.3600 0.0356 0.0766 D 0.069 0.25 0.1810 0.8000 0.1448 0.2138 E 0.0357 0.267 0.2313 1.0400 0.2406 0.2763 What is the Fair Value Price of the Following Stocks Based on the Constant Growth DDM? (Use the cost of capital (k) from above.) Based on the Gordon Constant Growth DDM the fair value price of Stock A equals D 1 = D 0 *(1+g) D 1 = \$1.40 *(1+0.12) = \$1.57 Stock Price Estimate = D 1 / (k-g) Stock Price Estimate = \$1.57

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## This note was uploaded on 02/10/2011 for the course FIN 300 taught by Professor Staff during the Spring '08 term at University of Illinois, Urbana Champaign.

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11UIUC%20FIN%20300%20CAPM%20DDM%20Practice%20Problems%20SP10%20v1

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