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% 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%; Constant Growth Model: 10.97%
B) CAPM: 11.7%; Constant Growth Model: 11.44%
C) CAPM: 10.1%; Constant Growth Model: 11.46%
D) CAPM: 9.2%; Constant Growth Model: 9.56%

Question

Quizplus · Accepted Answer

The CAPM required return is calculated as: Risk-free rate + Beta * (Market return - Risk-free rate) = 4% + 1.1 * (11% - 4%) = 11.7%. The Constant Growth Model required return is calculated as: (Dividend/Price) + Growth rate = ($0.65/$45) + 10% = 11.44%.

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