Easy CAPM Questions Made Annoying interest, question, relative, applies

ogoluwa

Simple question here that’s frustrating me.
Following info applies to World Turn Co.:
*10% rate of interest on newly issued bonds
*7% growth rate in earnings and dividends.
*The last dividend paid was $0.93
*Shares Sell for $16
*RiskFree Rate of interest is 5%
*Market Risk Premium is 6%
*Stock’s Beta = 1.5
*The firm is in a 40% marginal tax bracket
If the appropriate risk premium relative to the bond yeild is 4%, World turns equity cost for cap using ddm and the capm is closest to.
When I compute the capm I always use.
RFR + Beta(Expected Return  RFR)
But the solution uses RFR + Beta * Market Risk Premium
Does the market risk premium already exclude the RFR? What am I missing?
Thanks in advance.

dece2011

yea…so here you have Div1/Stock price + g
DDM and CAPM are two different models and can give different required return…it’s just sometime you have to use CAPM to get k to get the stock price and in this problem it’s the other way around