Question

#3

A stock just paid a dividend of $1.46. The dividend is expected to grow at 24.14% for two years and then grow at 3.55% thereafter. The required return on the stock is 11.92%. What is the value of the stock?

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Answer format: Currency: Round to: 2 decimal places.

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#4

The risk-free rate is 1.79% and the market risk premium is 4.64%. A stock with a β of 1.32 will have an expected return of ____%.

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Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

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#5

The risk-free rate is 3.14% and the expected return on the market 8.11%. A stock with a β of 1.17 will have an expected return of ____%.

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Answer format: Percentage Round to: 2 decimal places (Example: 9.24%, % sign required. Will accept decimal format rounded to 4 decimal places (ex: 0.0924))

Answer 1

3). Stock Price = [{D0 * (1 + g1)} / (1 + r)] + [{D0 * (1 + g1)²} / (1 + r)²] + [{D0 * (1 + g1)² * (1 + gC)} / {(r - gC) * (1 + r)²}]

= [{$1.46 * (1 + 0.2414)} / (1 + 0.1192)] + [{$1.46 * (1 + 0.2414)²} / (1 + 0.1192)²] + [{$1.46 * (1 + 0.2414)² * (1 + 0.0355)} / {(0.1192 - 0.0355) * (1 + 0.1192)²}]

= $1.62 + $1.80 + $22.22 = $25.64

4). According to the CAPM,

Expected Return = Risk-free Rate + [Beta * Market Risk Premium]

= 1.79% + [1.32 * 4.64%] = 1.79% + 6.12% = 7.91%

5). According to the CAPM,

Expected Return = Risk-free Rate + [Beta * (Expected Market Return - Risk-free Rate)]

= 3.14% + [1.17 * (8.11% - 3.14%)]

= 3.14% + [1.17 * 4.97%] = 3.14% + 5.81% = 8.95%