Determine the required rate of return.

Determine the value of the stock at the end of the year of $15 (given in the facts). The dividend received at the end of year one is $1.325 ($1.25 x 1.06). You can can choose to calculate in one of two ways. 6571 and the stock will sell for $15 at the end of the year. The risk-free-rate of return (Rf) is 5%, the return on the market (Rm) is 12%, the stockвЂ™s beta is. Therefore, Value = / (1 + k)^1 + / (1 + k)^1ДЄssume the dividend paid last year was $1.25 and that it will grow next year by 6%.

Discount the expected dividend and selling price at the required return.

Estimate the required return (k) for the investment using the capital asset pricing model:В k = Rf + B(Rm вЂ“ Rf).

Identify all expected future cash flows, which consist of all dividend(s) received and the ending value of the stock.To determine the stockвЂ™s value we need to: Let's start by valuing a stock with a one-year holding period. Compare this value to what the security is actually selling for to determine if the security is over- or undervalued.Use the required return to discount the expected cash flows and add their present values to determine the estimated value of the security.

Determine the required rate of return (k)В in the constant dividend growth model (this is sometimes given in a question).

Estimate the dollar amount and timing of expected cash flows (this is almost always given in a question).

First, it's important to note that the investment decision process consists of the following components:

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