None tesProblem 12-16 CAPM and Expected Return (LO2)A share of stock with a beta of 0.79 now sells for $61. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 6%,and the market risk premium is 9%.a. Suppose investors believe the stock will sell for $63 at year-end. Calculate the opportunity cost of capital. Is the stock a good or badbuy? What will investors do? (Do not round intermediate calculations. Round your opportunity cost of capital calculation as apercentage rounded to 2 decimal places.)Opportunity cost of capitalThe stock is abadbuy and the investors%b. At what price will the stock reach an "equilibrium" at which it is perceived as fairly priced today? (Do not round intermediatecalculations. Round your answer to 2 decimal places.)Stock price

a. Opportunity Cost of Capital and Stock Valuation Step 1: Calculate Opportunity Cost of Capital…

Answered: tes Problem 12-16 CAPM and Expected…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 11P

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A company currently pays a dividend of $2 per share (D0 = $2). It is estimated that the company’s dividend will grow at a rate of 20% per year for the next 2 years and then at a constant rate of 7% thereafter. The company’s stock has a beta of 1.2, the risk-free rate is 7.5%, and the market risk premium is 4%. What is your estimate of the stock’s current price?
Question 3 You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a ¢1,000 investment in each stock under four different economic conditions has the following probability distribution: Returns Probability Economic Condition Stock X Stock Y 0.1 Recession -50 -100 0.3 Slow Growth 20 50 0.4 Moderate Growth 100 130 0.2 Fast Growth 150 200 (a) Which of the investments has a better return and why? (b) Which of the investments is relatively less risky and why? (c) What type of association exists between the two-investment options X and Y? Interpret your results.
QUESTION 4 You are considering a Stock B that pays a dividend of RM1.5. The beta coefficient of B is 1.3. The risk free return is 7%, while the market average return is 13%. a. What is the required return for Stock B? b. If Stock B is selling for RM10 a share, is it a good buy if you expect earnings and dividends to grow at 6%?
Question 2 Suppose the yield on short -term government securities (perceived to be risk-free) is about 4% and the expected return by the market for a portfolio with a beta of 1 is 12%. Using the CAPM a. What is the expected return on the market portfolio b. What would be the expected return on a zero-beta stock? c. Suppose you consider buying a share of stock at K40. The stock is expected to pay a dividend of K3 next year and to sell then for K41. The stock risk has been evaluated at Beta - -0.5. Is the stock overpriced or Under-priced? (show your workings) d. If the expected rates of return on Portfolio A and B are 11% and 14% respectively and the Beta of A is o.8 while that of B is 1.5. The treasury bill is at 6%, while the expected return of the S&P500 index is 12%. The standard deviation of Portfolio A is 10% annually while that of B is 3196 and that of the Index is 20%. If you currently hold a market index portfolio, would you choose to add either of these portfolios to your…
Stock Beta Current Price Expected Price Expected Dividend X 0.8 $12.50 $13.10 $0.80 Y 1.1 $ 8.25 $ 9.76 $0.20 Z 2.1 $25.70 $30.04 $0.00 The expected price is in one year. The expected market return is 11.5% and the risk-free rate is 4.5%. According to the Capital Asset Pricing Model what rate of return are the stocks expected to earn Are the three stocks overvalued or undervalued in the market today Given the forecast of price and dividend for stock Z, what is its current fair market price based on the CAPM?
Question 1Imagine Lauratu, an investor who is contemplating a stock valued at $200 per share today that pays a 4% annual dividend. This stock has a beta of compared with the market 1.5, which means it is more volatile than a broad market portfolio (i.e., the S&P 500 index). Also, assume that the risk-free rate is 4% and this investor expects the market to rise in value by 8% per year.Calculate the Expected Return on an Asset given its Risk using the above information
QUESTION 1 Suppose you purchased a stock a year ago. Today, you receive a dividend of $16 and you sell the stock for $99. If your return was 11%, at what price did you buy the stock? QUESTION 2 A stock's risk premium is equal to the: a. risk-free rate plus the expected market risk premium b. expected market risk premium times beta c. expected market return times beta d. treasury bill yield plus the expected market return.
Please answer both A stock is currently selling for $90.83 and is expected to sell for $102.27 in 1 year. If the company pays a dividend of $2.63 what is the stock's HPR? QUESTION 2 A stock has a beta of 1.18. The risk free rate is 0.974% and the market risk premium is 5%. What is the fair return on the stock?
Question 25 (2.5 points) Listen The risk-free rate is 1.45% and the market risk premium is 5.21%. According to the Capital Asset Pricing Model (CAPM), a stock with a beta of 1.13 will have an %. expected return of 1) 7.34% 2) 15.66% 3) 5.56% 4) 9.12% 5) 13.25%
PART 3 1. You currently own a portfolio consisting of the following shares: Share Market Value Beta Expected Return A $20,000 1.20 15% $30,000 1.10 13% $40,000 0.90 10% You prefer to own a portfolio with lower risk. Therefore, you plan to sell half of the market value in Share A and replace it with a risk-free asset which yields an annual return of 5%. Calculate the expected return and the beta of your new portfolio. B.
If you buy a stock for a price of $23 and if you expect the stock to pay a dividend of $1.242 one year from now and to grow at a constant rate g = 8% in the future, then the required rate of return will be? Select one: a. 12.4% b. 13.4% c. 14.5% d. 20.4%
State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Recession 0.20 0.05 -0.17 Normal 0.55 0.08 0.12 Boom 0.25 0.13 0.29 d) Suppose Stock A has a beta of 0.8 and Stock B has a beta of 1.3. If you invest $35,000 in Stock A and $45,000 in Stock B, what is the beta of this portfolio? e) Expected return on the market (RM ) is 10% and the risk-free (rf) is 4%. What must the the expected return on the portfolio according to CAPM? (Use the beta you have calculated in section d) for CAPM)

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