$26.25 and theNote that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price Po=¹expected total return is equal to the required rate of return rs. If the market was more optimistic and the growth rate would be 6.00% rather than5.00%, the stock's forecasted intrinsic value would be Po$1.05= $35.00, which is greater than $26.25. In this case, you would call the0.0900-0.0600stock a "Buy".$1.050.0900-0.0500Suppose that the growth rate is expected to be 3.00%. In this case, the stock's forecasted intrinsic value would beprice, and the stock would be aits current Suppose that Do = $1.00 and the stock's last closing price is $26.25. It is expected that earnings and dividends will grow at a constant rate ofg = 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium,and the most appropriate required rate of return is rs = 9.00%.The dividend received in period 1 is D₁ = $1.00 × (1+0.0500) = $1.05 and the estimated intrinsic value in the same period is based on theconstant growth model: P₁ = P²Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period.Price(Dollars)$26.25PV of dividend at 9.00%(Dollars)DividendPeriod (Dollars)0$1.001.0512345The dividend yield for period 1 isThe capital gain yield expected during period 1 is4.00%O 5.00%and it will9.00%If it is forecasted that the total return equals 9.00% for the next 5 years, what is the forecasted total return out to infinity?O 14.00%and it willeach period.each period.

Since you have posted multiple questions, we will provide the solution only for the first question…

$1.05 Note that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price Po=D₁₁ = $26.25 and the 0.0900-0.0500 expected total return is equal to the required rate of return s. If the market was more optimistic and the growth rate would be 6.00% rather than = $35.00, which is greater than $26.25. In this case, you would call the 5.00%, the stock's forecasted intrinsic value would be Po = $1.05 0.0900-0.0600 stock a "Buy". = Suppose that the growth rate is expected to be 3.00%. In this case, the stock's forecasted intrinsic value would be price, and the stock would be a its current

$1.05 Note that this stock is called a "Hold" as its forecasted intrinsic value is equal to its current price Po=D₁₁ = $26.25 and the 0.0900-0.0500 expected total return is equal to the required rate of return s. If the market was more optimistic and the growth rate would be 6.00% rather than = $35.00, which is greater than $26.25. In this case, you would call the 5.00%, the stock's forecasted intrinsic value would be Po = $1.05 0.0900-0.0600 stock a "Buy". = Suppose that the growth rate is expected to be 3.00%. In this case, the stock's forecasted intrinsic value would be price, and the stock would be a its current

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Abnormal returns, if a stock has a(Alpha)=.004, b(Beta)=1.2, A. Using the market model (eq. 7.4), find the expected percent return if the market increases by 2%. B. If the actual return is 2%, 3%, or 4%, calculate the abnormal return.
None
Suppose that the CAPM is a good model of risk in the stock market. Suppose also that the average excess return on stocks is 10 percent and that the risk-free interest rate is 1 percent. What would you expect to be the return to stocks with each of the following beta coefficients? a 20.5 b 0.3 c 1.0 d 2.0
. E(RI) = .15(.11) + .55(.18) + .30(.08) Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta WND 0.80 STA 1.35 CTE 1.15 DUY 1.20 EVN -0.20 Stock WND the economy’s RFR to be 6 percent (0.06) and the expected return on the market portfolio (E(RM)) to be 8 percent (0.08) Stock STA, the economy’s RFR to be 5percent (0.05) and the expected return on the market portfolio (E(RM)) to be 7 percent(0.07) Assume that all the other stocks is as follows since we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09),
You live in a world where three future states are possible: Boom, Normal and Recession. See the probablities of these states in the attched table. Consider a stock which you expected to have the following returns in these states of the economy. State Probability Boom Normal Recession O 6.52% οιοιοι What is the standard deviation of returns on an investment in this stock? 6.37% ○ 4.62% 25% 55% 20% O 7.17% State Expected Return 0.15 0.08 -0.04
Please correct answer and step by step solution
1) Consider the following expectations for the market and two stocks in two possible equally likely states: State Market return Stock A Stock B Boom 25% 38% 12% Recession 5% -2% 6% a. What is the expected return on each stock? b. Given that the risk-free rate is 6%, draw the Security Market Line (SML) for this economy, and plot the two securities on the graph given that you have computed Stock A has a β of 2 and Stock B has a β of 0.3. c. Assuming that the CAPM holds, state for each of the two stocks if the stock is overvalued, correctly priced, or undervalued according to CAPM?
An analyst has estimated how a particular stock’s return will vary depending on what will happen to the economy. What is the standard deviation? STATE OF THEECONOMY PROBABILITY OFSTATE OCCURRING STOCK'S EXPECTEDRATE IF THISSTATE OCCURS Recession Below Average Average Above Average Boom .10 .20 .40 .20 .10 (.60) (.10) .15 .40 .90
A stock price P0=$23, and is expected to pay D1 = $1.242 one year from now and to grow at a constant rate of g=8% in the future. Suppose this analysis was conducted in January 1, 2002, what is the expected price at the end of 2002 and what is the Capital gains yield?
Using CAPM to determine the expected rate of return for risky assets, consider the following example stocks, assuming that you have already compute the betas Stock Beta A 0.70 B 1.00 C 1.15 D 1.40 E -0.30 Assume that we expect the economy’s RFR to be 5 percent (0.05) and the expected return on the market portfolio (E(RM)) to be 9 percent (0.09), 1, what would this imply? With these inputs, what would the be the following required rate of returns for these five stocks, show the formula for each in your calculations.
An investor is considering the purchase of Gryphon stock, which has returns given in the table below. Scenario Recession Normal Boom Enter your answers below. E(r) = Number Probability Std. Dev. = Number 0.23 0.41 10.36 Calculate the expected return and standard deviation of Gryphon. Round your answers to 2 decimal places. % Rate of Return 2% 6% 8% %
Consider the following multifactor (APT) model of security returns for a particular stock. Factor Risk Premium 7% Factor Inflation Industrial production Oil prices Factor Beta 1.4 0.9 0.6 Required: a. If T-bills currently offer a 4% yield, find the expected rate of return on this stock if the market views the stock as fairly priced. b. Suppose that the market expects the values for the three macro factors given in column 1 below, but that the actual values turn out as given in column 2. Calculate the revised expectations for the rate of return on the stock once the "surprises” become known. Expected Value 5 6% 5 3 Actual Value 4% 7 0 Factor Inflation Industrial production Oil prices Note: For all requirements, do not round intermediate calculations. Round your answers to 1 decimal place. X Answer is complete but not entirely correct. a. Expected rate of return 24.9 % b. Expected rate of return 9.6 X %

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