## Answers

a-1). D1 = D0 * (1 + g1) = $2.88 * (1 + 0.16) = $3.34

a-2). According to the CAPM,

Required Return = Risk-free Rate + [Beta * Market Risk Premium]

= 4% + [1.1 * 4.8%] = 4% + 5.28% = 9.28%

P1 = [D1 * (1 + gC)] / [r - gC] = [$3.3408 * (1 + 0.032)] / [0.0928 - 0.032] = $3.4477 / 0.0608 = $56.74

a-3). Intrinsic Value = [D1 + P1] / [1 + r]

= [$3.34 + $56.74] / [1 + 0.0928] = $60.05 / 1.0928 = $54.98

b). Expected Dividend Yield = D1 / P0 = $3.34 / $54.98 = 0.0607, or 6.07%

Hence, 2nd option is correct.

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