Expert Answers

We will calculate the expect value of its stock using the Constant Growth Model : Po = D1/(r – g) To do that we will have to estimate the vales of r, g, and D1. To estimate the value of r we will use the Capital Asset Pricing Model: CAPM = Rf + Beta(Rm – Rf) Where: Risk Free Rate = Rf = 3.5% Market Return = Rm = 12% Beta of BA 217 Corp. = .85

Question 1: Calculate “r”. Next we estimate the value of “g” using the average growth rate of past dividends. Assume 6 years ago MT 217 paid a dividend of $1.20 and this year they paid a dividend of $1.55, using the Excel RATE formula calculate the average growth rate it took for the dividend to the current level in the period of time.

Question 2: Calculate “g”. Next we estimate the value of D1, the dividend next year as required by the Constant Growth Model. D1 = Do(1 + g), where Do = the dividend today, $1.55 Question 3: Calculate “D1”. Using your solutions estimate the value of MT 217 Corporation’s stock using the Constant Growth Model. Po = D1/(r – g)

Question 4: Calculate the estimated value or Price Today of MT 217 = “Po”. Finally comment on this question. If the actual market value was BELOW your estimated value of MT217, and you were highly confident in your assumptions, what action might you take?