Question;Use the CAPM to calculate the Expect Rate of ReturnBased on the assumptions that:Risk Free Rate =Market Return =3.50% Rf12.00% Rm0.85We found the Beta of MT 217 Corp =SOCAPM =Rf + Beta(RM - Rf)3.59%r=Question 1This will be the "r" value that is used in the CGM.Estimatethevalueof"g"theconstantgrowthrate..Caclualte the Dividend Growth Rate of MT 217 for Constant Growth Model (CGM)We use actual MT 217 historyPVFVnPMT($1.20)$1.5560RateDividend paid 6 years ago.Dividend paid this year = Do)Negative so Excel can do the math4% This will be the Dividend Growth Rate = gQuestion 2Constant Growth ModelP0 =D1r g0.08-0.0041EstimatethevalueofMT217stockusingtheCGMD1 =$0.08Question 3Po =$19.51Question 4Question 5: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?First, double check your assumptions to be sure you are comfortable.Because, if the market price is lower than fair value, it's profitable to buy theasset since the market undervalued it! Remeber too that your assumptionsmight not capture the factors influencing the market value of the asset(liquidity, risks, transaction costs etc.). Also, if you believe that the marketundervaluing the asset is irrational, (remember the market doesn't becomerational because you bought the asset), the asset might stay 'undervalued'for a long time.Compatibility Report for Unit 6 DSA Template.xlsRun on 8/10/2010 19:56The following features in this workbook are not supported by earlier versions of Excel. These features may be lost or degraded when you save this workbook in an earlier file format.Minor loss of fidelitySome cells or styles in this workbook contain formatting that is not supported by the selected file format. These formats will be converted to the closest format available.
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