Question

Question 30

As an analyst for Grouper Inc., you are responsible for many firms, including ADFC. Currently you have a “hold” recommendation on ADFC. The current price of ADFC is $152. You have conducted an extensive analysis of the industry and you feel that the probability the firm will capture a substantial share of the new market is 35 percent. If the firm is able to capture the new market, you are expecting earnings to grow at a rate of 45 percent per year for the next five years. In that case, the stock price would rise to $232 due to the unusually high growth rate of future earnings. However, you feel there is a 40-percent probability that the firm will face serious difficulties in the near future, in which case the stock price will fall to $112, and the earnings growth rate will drop to 3 percent. There is a 25-percent chance that nothing will change for the firm and its earnings growth rate will remain at 12 percent.

Calculate the expected price in the future. (Round intermediate calculations to 4 decimal places, e.g. 31.2125 and final answer to 0 decimal places, e.g. 145.)

Expected price

$

Should you change your recommendation? Yes OR NO

Testbank, Question 29

What is the expected return on a stock that has a 15 percent probability of a 35 percent return, a 20 percent probability of a 25 percent return, a 50 percent probability of a 15 percent, and a probability of 15 percent of –20 percent?

18.75%

14.75%

13.75%

20.75%

Answer 1