KIC000101 - I¢ $" Determining the Required Rate of...

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Unformatted text preview: I¢ {- $- " Determining the Required Rate of Return to Value Stocks (cont’d) l The capital asset pricing model (cont’d) Non Constant growth I: A stock is not expected to pay a dividend overthe next four years. Five years from now . the compen anticipates that it will establish a dividend for 1 er share. Once the dividend is established, the me at expeets the dividends to grow by 5% every year forever. The risk free rate is 5%. beta is 1.2. and the market risk premium is 5%. The required return is expected to remain constant. What is the current stock price? Supernormal growth I DAA's stock is selling for $15 per share. The firm's income. and stock girioe has been growing at a phenomenal rate 0 of 15% and is expected to grow at this rate for 3 more years. No dividends have been declared esget, but the firm intends to declare dividends at the and o the last year of supemon-nal rowth. ( 03: $2). Afler that the divndends are expected 0 grow at the firm's normal growth rate of 6%. The firms uired return is 6%. is the stock currently overvalue or undervalued by the market. :1 Limitations of the CAPM - A study by Fame and French found that beta IS unrelated to the return on stock over the 1963—1990 period I Chan and Lakonishok: :1 Found thlt the relatlnn between mar returns 1nd beta varied with the time period used :1 Condudld that it is appmnfiah In question whether beta is the driving force behind stock mums n Fnund that firms with the highest betas plflnnnad much worse than firms with low bolas :2 Found Hut him-hut: firms outperformed low-bale firms du rind market upswing: ...
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