Question

5,6,7,8

5. Stock valuation is impacted by 2. Dividends b. The growth rate of dividends c. The risk associated with the firm issuing the stock d. All of the above e. Answers a, b, and c plus for how much you can sell the stock in the future. Inflation, recession, and high interest rates are economic events that are best characterized as being a. systematic risk factors that can be diversified away. b. company-specific risk factors that can be diversified away. c. among the factors that are responsible for market risk. d. risks that are beyond the control of investors and thus should not be considered by security analysts or portfolio managers. e irrelevant except to governmental authorities like the Federal Reserve. Calculate the required rate of return for Climax Inc., assuming that (1) investors expect a 4.0% rate of inflation in the future, (2) the real risk-free rate is 3.0%, (3) the market tisk premium is 5.0%, (4) the firm has a beta of 1.00, and (5) its realized rate of return has averaged 15.0% over the last 5 years. a. 10.29% b. 10.83% c. 11.40% d. 12.00% e. 12.60% Cooley Company's stock has a beta of 1.40, the risk-free rate is 4.25%, and the market risk premium is 5.50%. What is the firm's required rate of return? a. 11.36% b. 11.65% c. 11.95% d. 12.25% e. 12.55%

Answer 1

5]

Value of stock = present value of dividends.

Present value of dividends = next year dividend / (required return - growth rate of dividends).

The required return is the risk associated with the firm, since investors require higher return for firms with higher risk.

Therefore, the value of a stock is impacted by dividends, growth rate of dividends, and the risk of the firm.

The answer is (d) - all of the above.

(e) is incorrect - the sale price of the stock at any point in the future includes all the dividends after the sale date. Hence, this is included in the present value of dividends.