Question

please answer all question!! thank you

14. A Treasury bill pays a 6% rate of return. A risk averse investor invest in a risky portfolio with a 50% probability of earning a 10% return and a 50% probability of earning only 2% - a. might; because she is rewarded a risk premium. b. would not; the investor is not rewarded any risk premium. would not; the risk premium is too small. cannot be determined from the information provided. c. 15. Hascall Manfacturing Company is expected to have EPS in the upcoming year of $6.00. The expected ROE is 18.0%. An appropriate required return on the stock is 14%. If the firm has a plowback ratio of 70%, what is its intrinsic value a. $20.93 b. $ 69.77 $128.57 $150.00 Odoo

Answer 1

14. The expected return on risky portfolio is 50% *10% +50% *2% = 6% which is equal to risk free rate.

So the correct answer is b

15. Growth rate = ROE * Plowback ratio = 18% * 70% = 12.60%

Intrinsic value = EPS * (1- plowback ratio) / ( Require return - growth rate)

= 6 * (1 - 70%) / ( 14% - 12.60%) = 128.57

the correct answer is c