Question

3. Consider the situation with the following initial values. The risk-free rate of return is 3 percent, and the expected return on the market is 8.7 percent. Stock A has a beta coefficient of 1.4, a dividend growth rate of 5 percent, and a current dividend of $2.60 per share. (a) (5 points) What is the value of the stock? (b) (5 points) If the current market price of the stock is $27 per share, what should you do? (c) (10 points) If the expected return on the market rises to 10 percent and the other variables remain at their initial values, what will be the value of the stock? Explain why the value of the stock changes from the value you found in part (a) (d) (10 points) If the risk-free return rises to 4.5 percent and the return on the market rises to 10.2 percent, but all other variables remain at their initial values, what will be the value of the stock? Explain why the value of the stock changes from the value you found in part (a) (e) (10 points) If the beta coefficient falls to 1.1 and the other variables remain at their initial values, what will be the value of the stock? Explain why the value of the stock changes from the value you found in part (a) 4. Intel corporation, an American multinational corporation that manufacturers semicon- ductors, issued a 5 percent coupon bond with a par value of $1,000 and a maturity date of 15 years. Five years have passed since the bond was originally issued and the bond is currently selling for $690 (a) (5 points) What is the current yield? (b) (5 points) What is the yield to maturity? (c) (5 points) If five years from now the yield to maturity is 10 percent, w be 5. (5 points) Your broker ofers to sell you a $1,000 par value AAA-rated bond for a price Given that the interest rate on comparable debt is 4 percent, is your broker fairly pricing the price of the bond? of $1,150 The bond has a coupon rate of 6 percent and a time to maturity of 8 years the bond

Answer 1

As per CAPM Expected return-risk free rate(Market return -risk free rate) Beta 3 a) Expected return 10.98% Value of stock 45.65 10 We will take long positition in the stock 12 13 14 15 16 17 18 19 20 21 c) Expected return 12.80% Value of stock The value decreased as the expected return on stock increased due to increase in market return 35.00 d) Expected return 14.58% Value of stock The value decreased as the expected return increased on the stock increase due to increase in risk free rate and market return 28.50 26 Expected return 9.27% 63.93 Value of stock The value increase as the expected return falls on the stock increase due to decrease in beta 29

As per CAPM Expected return risk free rate (Market return-risk free rate ) * Beta 3 a) Expected return -3% +(8.7%-3%)*1.4 0.05 -2.6 (1+E6)/(ES-E6) Value of stock We will take long positition in the stock 12 13 c) Expected return -3% +(10%-3%).1.4 0.05 2.6 (1+E15)/(E14-E15) 15 16 17 18 19 20 Value of stock The value decreased as the expected return on stock increased due to increase in market return d) Expected return -4.5% +(10.2%-3%). 1.4 0.05 -2.6 (1+E21)/(E20-E21) Value of stock The value decreased as the expected return increased on the stock increase due to increase in risk free ra 23 25 26 Expected return .3% +18.7%-3%)*1.1 0.05 -2.6* (1+E27)/(E26-E27) 28 29 Value of stock The value increase as the expected return falls on the stock increase due to decrease in beta