Required rate of return using DDM and CAPM (Solved)

Description

Question

A Company’s stock currently sells for $32 per share, will pay a dividend of $6.4 next year, and the dividend is expected to grow at 1.6% per year in the future.

1. Using the DDM approach, what is the required rate of return for this stock?
2. If the company’s beta is 1.2, the risk-free rate is 7%, and the market return is 17%, what will be the company’s required rate of return using the CAPM approach?
3. If the estimated required rate of return is not the same using the CAPM and DDM approaches, how we can decide on the proper value for the required rate of return? Explain.