- Now, let’s check the stability of Beta:

(a) Is there a substantial difference between the four Betas? COMMENT!(5 points)

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(b) How do your estimates compare to the Finance.Yahoo.com beta and the Value Line beta? (5 points)

- Given the information below, use the CAPM to estimate the required rate of return for MSFT. Round to 2 decimals, e.g., x.xx%, 1.23%

Return on the market portfolio (SPY)R_{SPY}= 9.0%(based on 25 years of historical data); the risk free rate is

R_{f}= 3.0%(based on L-T inflation rate of 2.0% & real return of 1.0%); USE MSFT beta estimate: b= 1.10

(5 points)

- Based on past trends and ValueLine estimate, let’s assume MSFT will pay a dividend of $1.84 in 2019. Therefore, let’s assume that D
_{1}= $1.84. Let’s also assume that MSFT will grow its future dividends at a L-T constant rate of g = 6%. Assuming a required rate of return found in (8) above, estimate the current value of MSFT using the Constant Growth DDM. Assume that D_{1}= $1.84

(10 points)

- Now, using the Value Linesheet, estimate the average growth rate of dividends for MSFT over the last 10 years, from 2008-2018? Round your growth estimate to 4 decimal places. [Hint: The Growth rate (g) can be calculated as CPT i on your calculator orin Excel as a TVM problem.

[For example: What is the rate of return if you invest $1 (div0) today and in 10 years it is worth $4 (div10)?]

(5 points)

- Two-stage Non-constant DDM:Now let’s assume that for the next four yearsMSFT will grow its dividends at the growth rate you estimated in (10) above. AssumingD
_{1}= $1.84, what are the dividends for: D_{2}; D_{3}; D_{4}; and D_{5}if they grow at the rate estimated in (10) above? You may round each dividend estimate to the nearest penny. (10 points)

- Now, let’s assume that the dividend growth reverts back to a L-T sustainable growth rate = 6% afterYear 5, that is from Year 6 to infinity. Estimate is D
_{6}and P_{5}.

(5 points)

- Use the Non-constant growth DDMfrom the Stock Video Lecture (at 17:20) to estimate the current value of MSFT using the dividend information you found in (11) & (12) above; assume a L-T sustainable growth rate of g = 6% after Year 5; and the required rate of return found in (8). [HINT: You already have all the data, not much work left here….find the sum of the PV of the cash flows.]

- Which of the two models do you think is more reasonable (Constant DDM or Non-constant DDM)? WHY?

(5 points)

- What is the current market price of MSFT (see finance.yahoo.com and give the date for quoted price)?

Based on your analysis, would you recommend buying Microsoft stock at quoted current market price?

You must provide a proper explanation of WHY or WHY NOT based on this analysis. (5 points)

Microsoft | S&P 500 Index | |

Average Monthly Return | 1.7997% | 1.1048% |

Standard Deviation | 6.4097% | 3.9680% |

Correlation | 0.629437 | |

Beta (120 Months) | 1.0168 | |

Beta (First 60 Months) | 0.9515 | |

Beta (Second 60 Months) | 1.1961 | |

Beta (Last 36 Months) | 1.1066 |

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