Please check my work below figuring the CAPM approach. Finally, how do I go about utilizing the discounted dividend approach to story problem below?
CAPM = Risk free rate + Beta x [Rate of return = Risk free rate]
=5 + 1.75 x [12.5% -5]
=5 + 13.125%
=18.125% ??
Story problem: XYZ company has a marginal tax rate is 40 percent. The company can raise debt at a 10.9 percent interest rate. The risk-free rate is 5%, the return on the stock market is 12.5% and the firm has a beta of 1.75. The last dividend paid by Miller was $1.00 and its growth rate expected in earnings and dividends is 6 percent. Mickey plans to finance all capital expenditures with 40 percent debt and 60 percent equity. The stock price is $8.75