Dul Melissa is unsure about the financial reporting integrity of Generic's finance team. She decides to add an extra 1.5% "credibility" risk premium to the required return as part of her valuation analysis. and pald a $4 dividend last year. The required return for utility stocks is 9%, a. What is the value of Generic's stock, assuming that the financials are trustworthy? b. What is the value of Generic's stock, assuming that Melissa includes the extra 1.5% "credibility" risk premium? c. What is the difference between the values found in parts a and b, and how might one interpret that difference? a. The expected value of Generic's stock, assuming that the required rate of return for utility stocks is applicable to Generic Utility, Inc., is $. (Round to the nearest cent.) b. The expected value of Generic's stock, assuming that Melissa includes the extra 1.5% "credibility" risk premium, is S. (Round to the nearest cent.) c. Comparing the findings in parts a and b, the amount the expected value of the stock, if Melissa includes a credibility premium in her calculations, will be less than when assuming the required rate of return for utilities is $. (Round to the nearest cent.) Based on your answer above, judge whether the following statement is true or false? (Select the best answer below.) Lack of integrity may hurt stock prices because of the "credibility premium." True O False
Dul Melissa is unsure about the financial reporting integrity of Generic's finance team. She decides to add an extra 1.5% "credibility" risk premium to the required return as part of her valuation analysis. and pald a $4 dividend last year. The required return for utility stocks is 9%, a. What is the value of Generic's stock, assuming that the financials are trustworthy? b. What is the value of Generic's stock, assuming that Melissa includes the extra 1.5% "credibility" risk premium? c. What is the difference between the values found in parts a and b, and how might one interpret that difference? a. The expected value of Generic's stock, assuming that the required rate of return for utility stocks is applicable to Generic Utility, Inc., is $. (Round to the nearest cent.) b. The expected value of Generic's stock, assuming that Melissa includes the extra 1.5% "credibility" risk premium, is S. (Round to the nearest cent.) c. Comparing the findings in parts a and b, the amount the expected value of the stock, if Melissa includes a credibility premium in her calculations, will be less than when assuming the required rate of return for utilities is $. (Round to the nearest cent.) Based on your answer above, judge whether the following statement is true or false? (Select the best answer below.) Lack of integrity may hurt stock prices because of the "credibility premium." True O False
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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Transcribed Image Text:ETHICS PROBLEM Melissa is trying to value the stock of Generic Utility, Inc., which is clearly not growing at all. Generic declared and paid a $4 dividend last year. The required return for utility stocks is 9%,
but Melissa is unsure about the financial reporting integrity of Generic's finance team. She decides to add an extra 1.5% "credibility" risk premium to the required return as part of her valuation analysis.
a. What is the value of Generic's stock, assuming that the financials are trustworthy?
b. What is the value of Generic's stock, assuming that Melissa includes the extra 1.5% "credibility" risk premium?
c. What is the difference between the values found in parts a and b, and how might one interpret that difference?
a. The expected value of Generic's stock, assuming that the required rate of return for utility stocks is applicable to Generic Utility, Inc., is $. (Round to the nearest cent.)
b. The expected value of Generic's stock, assuming that Melissa includes the extra 1.5% "credibility" risk premium, is
. (Round to the nearest cent.)
c. Comparing the findings in parts a and b, the amount the expected value of the stock, if Melissa includes a credibility premium in her calculations, will be less than when assuming the required rate of return for
utilities is $
(Round to the nearest cent.)
Based on your answer above, judge whether the following statement is true or false? (Select the best answer below.)
Lack of integrity may hurt stock prices because of the "credibility premium."
O True
O False
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