1. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected (required) return for the following stocks, and plot them on an SML graph. (10 marks) Stock Beta E (RA) .20 U 0.85 N 1.25 D -0.20 2. You ask a stockbroker what the firm's research department expects for the three stocks in Question 1 above. The broker responds with the following information: Stock Current Price Expected Price Expected Dividend U ZD 22 24 0.75 N 48 51 2.00 37 40 1.25 Plot your estimated returns on the graph from question 1 and indicate what actions you would take with regard to these stocks. Discuss your decisions.

1. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected (required) return for the following stocks, and plot them on an SML graph. (10 marks) Stock Beta E (RA) .20 U 0.85 N 1.25 D -0.20 2. You ask a stockbroker what the firm's research department expects for the three stocks in Question 1 above. The broker responds with the following information: Stock Current Price Expected Price Expected Dividend U ZD 22 24 0.75 N 48 51 2.00 37 40 1.25 Plot your estimated returns on the graph from question 1 and indicate what actions you would take with regard to these stocks. Discuss your decisions.

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 4P: An analyst has modeled the stock of a company using the Fama-French three-factor model. The market...

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a. You expect an RFR of 10 percent and the market return (RM) of 14 percent. Compute the expected return for the following stocks, and plot them on an SML graph. Stock Beta E(Ri) U 0.85 N 1.25 D -0.2 b. You ask a stockbroker what the firm's research department expects for these three stocks. The broker responds with the following information: Stock Current Price Expected Price Expected Dividend U 22 24 0.75 N 48 51 2 D 37 40 1.25 Plot your estimated returns on the graph from part (a) and indicate what actions you would take with regard to these stocks. Explain your decisions.
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