Salt Lake City Services, Inc., provides maintenance services for commercial buildings. Currently, the beta on its common stock is 1.08. The risk-free rate is now l0%, and the expected return on the market portfolio is 15%. It is January l, and the company is expected to pay a $2 per share dividend at the end of the year, and the dividend is expected to grow at a compound annual rate of l1% for many years to come. Based on the CAPM and other assumptions you might make, what dollar value would you place on one share of this common stock?

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1.71K viewsJanuary 1, 2017

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Darshita 6.14K January 1, 2017 0 Comments

Salt Lake City Services, Inc., provides maintenance services for commercial buildings.

Currently, the beta on its common stock is 1.08. The risk-free rate is now l0%, and

the expected return on the market portfolio is 15%. It is January l, and the company

is expected to pay a $2 per share dividend at the end of the year, and the dividend is

expected to grow at a compound annual rate of l1% for many years to come. Based

on the CAPM and other assumptions you might make, what dollar value would you place

on one share of this common stock?

score 0 · Answer 1 · 2017-01-01T06:31:33+00:00

Required return = Rf + (Rm – Rf)β

= 0.10 + (0.15 – 0.10)(1.08)

= 0.10 + .054 = 0.154 or 15.4%

Assuming that the dividend growth model is appropriate, we get

V = D1/(ke – g) = $2/(0.154 –0.11) = $2/0.044 = $45.45

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