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Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year....

Cache Creek Manufacturing Company is expected to pay a dividend of $3.36 in the upcoming year. Dividends are expected to grow at 8% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Investors use the CAPM to compute the market capitalization rate and use the constant-growth DDM to determine the value of the stock. The stock's current price is $84. Using the constant-growth DDM, the market capitalization rate is _________.

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Answer #1

The following details have been provided:

Current Stock Price = $84

Dividend to be paid next year = $3.36

Growth rate = 8%

So, the formula to determine the market capitalisation rate is:

where

D1 is the dividend paid next year

P0 is the current stock price

g is the growth rate

MCR is the market capitalisation rate

So, plugging in the figures, we get

MCR = $3.36/$84 + 0.08

MCR = 0.04 + 0.08 = 0.12

Therefore, Market Capitalisation rate according to DDM is 12% approx

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