Question

14. If an investor buys enough stocks, he or she can, through diversification, eliminate all of the unique risk inherent in owning stocks, but as a general rule it will not be possible to eliminate all systemic risk. a. True b. False 15. A stock is expected to pay a dividend of $0.75 at the end of year one. The required rate of return is rs = 10.5%, and the company has a return on equity of 12.8%, while paying out half of its earnings as dividends. What is the stock's current price? t ol DOO a. $17.39 b. $17.84 bo c. $18.29 d. $18.75 e. $19.22

Answer 1

Ans 14) True

Reason: Systematic Risk arises on account of the economy wide uncertainties and the tendency of individual securities to move together with the change in the market.This part of risk can not be reduced through portfolio diversification and it is also known as market risk for example the government changes the interest and corporate tax policy will have a similar effect on the portfolio.

Ans 15) To get the price of stock as on today we need to follow the following steps

• Div=Percentage of earning as dividend* Dividend
• Div=(1-0.50)% * $ 0.75= $0.375
• g=0.5*0.128=0.064% (50% return on equity of 12.8%)
• K=Require rate of return i.e 10.5%
• Using the same in the formula

P=Div /K-g

Price of stock= 0.375/ (.105-0.064)

                        =0.375/.041

So the price of stock (p)= $ 9.1463

Ans 14) True

Reason: Systematic Risk arises on account of the economy wide uncertainties and the tendency of individual securities to move together with the change in the market.This part of risk can not be reduced through portfolio diversification and it is also known as market risk for example the government changes the interest and corporate tax policy will have a similar effect on the portfolio.

Ans 15) To get the price of stock as on today we need to follow the following steps

• Div=Percentage of earning as dividend* Dividend
• Div=(1-0.50)% * $ 0.75= $0.375
• g=0.5*0.128=0.064% (50% return on equity of 12.8%)
• K=Require rate of return i.e 10.5%
• Using the same in the formula

P=Div /K-g

Price of stock= 0.375/ (.105-0.064)

                        =0.375/.041

So the price of stock (p)= $ 9.1463