Question

eBook Problem 11-06 The risk-free rate of return is 1 percent, and the expected return on the market is 7.1 percent. Stock A has a beta coefficient of 1.4, an earnings and dividend growth rate of 6 percent, and a current dividend of $3.50 a share. Do not round intermediate calculations. Round your answers to the nearest cent. .. What should be the market price of the stock? $ b. If the current market price of the stock is $119.00, what should you do? -Set be purchased c. If the expected return on the market rises to 11.1 percent and the other variables remain constant, what will be the value of the stock? The stock $ d. If the risk-free return rises to 2.5 percent and the return on the market rises to 11.5 percent, what will be the value of the stock? $ e. If the beta coefficient falls to 1.1 and the other variables remain constant, what will be the value of the stock? $ f. Explain why the stock's value changes in c through e. The increase in the return on the market the required return and select the value of the stock. The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to The decrease in the beta coefficient causes the firm to become -Seleen. Brisky as measured by beta, which seat the value of the stock. Grade it Now Save & Continue Continue without saving

Answer 1

А B C с D E F G H I 1% 7.10% 6.10% 1 R 2 RM 3 R-R 4 Beta 5 g 6 R. 1.4 6% 9.54% R = R + beta(Rm-R:) 7 Do 8 D $3.50 $3.71 Di = D. (1+g) 9 10 a) Market price of the stock $104.80 D/(Re- g) 11 b) 12 13 Current market price of the stock = $119.00 As the current market price of the stock is greater than the intrinsic price of stock calculated in part (a), we should sell the stock i.e the stock should not be purchased. 14 15

А B с D m F G 1% 11.10% 10.10% 1 R 2 Ro 3 R-R 4 Beta 5 8 6 Re 7 Do 1.4 6% 15.14% R = R + beta(Rm-R:) $3.50 $3.71 8 D D = D. (1+g) 9 10 c) Market price of the stock $40.59 D/(Re-g) 11

A B с D LL F G 2.50% 1 Ri 2 Rm 3 R-R 11.50% 9.00% 4 Beta 1.4 R = R + beta(Rm - Rt) 5 g 6 Re 7 D. 8 D 9 6% 15.100% $3.50 $3.71 Di = D. (1+g) 10 d) Market price of the stock $40.77 D/(R-8) 11

A B C D E F G H 1.00% 7.10% 6.10% 1 RF 2 Rm 3 Rm-R, 4 Beta 5 g 6 Re 7 D. 8 D 1.1 6% 7.710% R = R + beta(Rm - R+) $3.50 $3.71 Di = D. (1+g) 9 10 e) Market price of the stock $216.96 D/(Re- g) 11

f) The increase in the return on the market increases the required return and decreases the value of the stock. The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to decrease. The decrease in the beta coefficient causes the firm to become less risky as measured by beta, which increases the value of the stock.