Praxair's Upcoming Dividend Is Expected to Be $2

question 31

Multiple Choice

Praxair's upcoming dividend is expected to be $2.25 and its stock is selling at $65. The firm has a beta of 0.8 and is expected to grow at 10 percent for the foreseeable future. Compute Praxair's required return using both CAPM and the constant growth model. Assume that the market portfolio will earn 10 percent and the risk-free rate is 3 percent.

• A) CAPM: 8.6 percent; Constant Growth Model: 13.46 percent
• B) CAPM: 9.7 percent; Constant Growth Model: 12.56 percent
• C) CAPM: 10.1 percent; Constant Growth Model: 11.46 percent
• D) CAPM: 8.2 percent; Constant Growth Model: 9.56 percent

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Definitions:

Net Cash Flow

The difference between a company's cash inflows and outflows within a specified period, representing the overall change in its cash position.

Average Rate of Return

A financial ratio that compares the average annual profit of an investment to its initial cost, often used to assess the profitability of an investment over time.

Present Value Factors

Multipliers used to calculate the present value of a future amount of money or stream of cash flows given a specific discount rate.

Net Present Value

A financial metric that evaluates the profitability of an investment or project by calculating the present value of expected future cash flows, minus the initial investment cost.