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solution

Metro enterprises has a beta of 1.20, the risk free rate of return is currently —– (consider the current rate of treasury bills that is 0.0775) and the market return is 14%. The company, which plans to pay a dividend of Rs 2.60 per share in the coming year (2007) anticipates that its future dividends will increase at an annual rate consistent with that experienced over the 2002- 2006 period, when the following dividends were paid.

Year

2000

2001

2002

2003

2004

2005

2006

Div. per share

1.73

1.80

1.82

1.95

2.10

2.28

2.45

Required:

  1. Use the capital asset pricing model to determine the required return on Metro stock.
  2. Using the constant growth model and your finding in part a), estimate the value of company stock.

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