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Unformatted text preview: that rate. Finally, we could use the analysts' forecasted g range, 10 to 15 percent. The dividend yield is D 1 /P . Assuming g = 12%, 1 P D = 20 $ ) 12 . 1 ( 1 $ = 5.6%. One could look at a range of yields, based on P in the range of $17 to $23, but because we believe in efficient markets, we would use P = $20. Thus, the DCF model suggests a r s in the range of 15.6 to 20.6 percent: Highest: r s = 5.6% + 15% = 20.6%. Lowest: r s = 5.6% + 10% = 15.6%. Midpoint: r s = 5.6% + 12.5% = 18.1%. Generalized risk premium . Highest: r s = 12% + 6% = 18%. Lowest: r s = 12% + 4% = 16%. Midpoint: r s = 12% + 5% = 17%. Based on the three midpoint estimates, we have r s in this range: CAPM 17.5% DCF 18.1% Risk Premium 17.0% Answers and Solutions: 10  9...
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 Spring '08
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