a. What is the market risk premium? Show your work. b. What is the cost of equity for XYZ? Show your work. c. What is the stock XYZ risk premium? Show your work. d. Draw the graph of the Security Market Line and show the stock of XYZ on the graph
The
bank account is 1%. The B (beta) of stock XYZ is 1.5. Use the data to answer the questions
below.
a. What is the market risk premium? Show your work.
b. What is the
c. What is the stock XYZ risk premium? Show your work.
d. Draw the graph of the Security Market Line and show the stock of XYZ on the graph.
The end-of-year dividend on stock ABC is expected to be $0.8. The growth
expected to be 5 percent for ever. The current price of the ABC stock is $10. Use the data to
answer the questions below.
e. What is the cost of equity for stock ABC? Show your work.
f. Suppose stock KLM has the same end-of-year dividend, dividend growth rate and
price as stock ABC, but the risk of KLM stock is much greater than of the ABC stock.
What is your estimate of the cost of equity of stock KLM using the method at part e?
Do you agree with the valuation of the cost of equity? Justify your opinion
Please note that only 1 question can be solved under the Answering Guidelines.
The solution to stock XYZ questions are given below.
Using CAPM formula, we can solve this question.
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