3-a) Computation of Market Capitalization of the Company:

First we calculate Cost of Equity using CAPM:

Cost of Equity = Risk-free Rate + Beta*Market Risk Premium

= 8% + 0.8*(15%-8%)

= 8% + 5.6% 

Cost of Equity = 13.6%

 

Now we calculate Growth Rate:

Growth Rate = (Dividend per Share Today/Dividend per Share 4 Years Ago)^(1/Number of Years) - 1

= ($0.24/$0.1525)^(1/4) - 1

= 1.1200 - 1

Growth Rate = 0.12 or 12%

 

Market Capitalization per Share = Next Year Dividend/(Cost of Equity + Growth Rate)

= ($0.24*(1+12%)) / (13.6% - 12%)

= $0.2688/ 1.6%

= $16.80 per share

 

Market Capitalization for Company = Number of Shares Outstanding*Market Capitalization per Share

= 4,000,000*$16.80

= 67,200,000

 

3-b) Computation of Market Capitalization of the Company:

First we calculate Cost of Equity using CAPM:

Cost of Equity = Risk-free Rate + Beta*Market Risk Premium

= 5% + 1.1*(12%-5%)

= 5% + 7.7% 

Cost of Equity = 12.7%

 

 

Now we calculate Growth Rate:

Growth Rate = Retention Ratio*ROE

= (1-Payout Ratio)*ROE

= (1-(0.18/0.25))*20%

= (1-0.72)*20%

= 0.28*20%

Growth Rate = 5.60%

 

Market Capitalization per Share = Next Year Dividend/(Cost of Equity + Growth Rate)

= ($0.18*(1+5.60%)) / (12.7% - 5.6%)

= $0.19008/ 7.10%

= $2.68 per share

 

Market Capitalization for Company = Number of Shares Outstanding*Market Capitalization per Share

= 2,000,000*$2.68

= 5,354,366.20