The stock of Microsoft Corp. traded for $280.35 with current dividend of $2.19 per share, growth rate of 5%, and P/E of 30.76. The stock beta is 0.91, the risk-free rate is 1.7% and the S&P500 index return is 6.5%.
REQUIRED
a. Calculate the required return for the stock according to CAPM.
b. Use the dividend discount model to value the stock. What is the purpose of stock valuation?
c. Calculate the implied expected return. What does this imply for stock valuation?
d. Due to sharp competition in the computer industry, the market revised the estimate of the growth rate to 4%. What should be the effect on the stock price?
