CAS Exam 7 Spring 2015, Question 17
Study guide: Exam 7
Given the following financial projections for a company as of December 31, 2014:
| Year | After-Tax Net Income ($000) |
|---|---|
| 2015 | 15,200 |
| 2016 | 16,100 |
| 2017 | 17,300 |
| 2018 | 18,500 |
| Item | Value |
|---|---|
| Dividend payout ratio | 60% of after-tax income |
| Company ROE | 10.0% |
| Risk-free rate | 3.2% |
| Market risk premium | 4.0% |
| Company beta | 0.75 |
| Industry beta | 0.89 |
| Industry average growth rate | 5.5% |
Part a (2.25 points)
Use the dividend discount model to value this company as of December 31, 2014.
Part b (0.5 points)
Briefly describe two considerations when using an industry beta.
Part c (0.75 points)
Assess the reasonableness of the company beta.
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