Estee Lauder's upcoming dividend is expected to be $0.65 and its stock is selling at $45. The firm has a beta of 1.1 and is expected to grow at 10 percent for the foreseeable future. Compute Estee Lauder's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 11 percent and the risk-free rate is 4 percent.
A) CAPM: 11.2 percent; Constant Growth Model: 10.97 percent
B) CAPM: 11.7 percent; Constant Growth Model: 11.44 percent
C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent
D) CAPM: 9.2 percent; Constant Growth Model: 9.56 percent

Question

Quizplus · Accepted Answer

Using CAPM, the required return = Risk-free rate + Beta * (Market return - Risk-free rate) = 4% + 1.1 * (11% - 4%) = 11.7%. For the Constant Growth Model, the required return = (Dividend/Price) + Growth rate = ($0.65/$45) + 10% = 11.44%.

Estee Lauder's Upcoming Dividend Is Expected to Be $0