Problem 11-03An investor with a required return of 12 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows:FirmCurrent earningsCurrent dividendExpected annual growth rate individends and earningsCurrent market priceABC$2.30 $3.50 $7.30$1.10 $3.20 $7.40-1%6%b. If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places.%1%$24 $ 32$ 32 $ 64a. What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent.Stock A: $Stock B: $Stock C: $c. If the appropriate P/E ratio is 11, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent.Stock A: $Stock B: $Stock C: $If the appropriate P/E ratio is 6, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent.Stock A: $Stock B: $Stock C: $

COST OF EQUITY (Ke) Cost of equity is the required rate of return that the Investor expected…

Answered: Problem 11-03 An investor with a…

Fundamentals of Financial Management (MindTap Course List)

14th Edition

ISBN:9781285867977

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter9: Stocks And Their Valuation

Section: Chapter Questions

Problem 12P: VALUATION OF A CONSTANT GROWTH STOCK Investors require a 15% rate of return on Levine Companys stock...

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Question 4 Analyzing the stock market produces the following information about the returns of two stocks: Expected Return Standard Deviation Stock 1 -15% 11% Stock 2 -20% 21% Assume that the returns are positively correlated, with correlation = 0.60. (0) Find the mean and standard deviation of the return on a portfolio consisting of an equal investment in each of the two stocks. Suppose that you wish to invest $1 million. Discuss whether you should invest your money in stock 1, stock 2, or a portfolio composed of an equal amount of both stocks.
REVIEW AND SELF-TEST PROBLEMS 12.1 Calculating the Cost of Equity Suppose stock in Boone Corporation has a beta of .90. The market risk premium is 7 percent, and the risk-free rate is 8 percent. Boone's last dividend was $1.80 per share, and the dividend is expected to grow at 7 percent indefinitely. The stock currently sells for $25. What is Boone's cost of equity capital? (See Problem 1.)
Estimated rate of return for Stock shareholders A B Estimated price in T1 4 4 Estimated dividend in T1 0,2 12% 15% 0,5 Calculate, for both stocks, the equilibrium price in TO. With a market rate of return of 6% and a risk free rate of 1,5%, calculate the Beta of the two stocks. Which percentage of stock A and B should you buy in your portfolio so as to generate a rate of return of 13,25%? What would be the beta of this portfolio?
Problem 13-1 Calculating Cost of Equity The Swanson Corporation's common stock has a beta of 1.5. If the risk-free rate is 5.5 percent and the expected return on the market is 13 percent, what is the company's cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Cost of equity capital %
8-21 capital of $500 million invested in five stocks: Stock Investment Stock's Beta Coefficient A $160 million 0.5 В 120 million 1.2 80 million 1.8 D 80 million 1.0 60 million 1.6 Kish's beta coefficient can be found as a weighted average of its stocks' betas. The risk-e rate is 6%, and you believe the following probability distribution for future market retums is realistic: TT Probability Market Return 0.1 - 28% 0.2 0.4 12 0.2 30 0.1 50 What is the equation for the security market line (SML)? (Hint: First, determine the expected market return.) Calculate Kish's required rate of return. c. Suppose Rick Kish, the president, receives a proposal from a company seeking new capital. The amount needed to take a position in the stock is $50 million, it has ar expected return of 15%, and its estimated beta is 1.5. Should Kish invest in the new company? At what expected rate of return should Kish be indifferent to purchasang the stock? а. b.
eBook Problem 11-03 An investor with a required return of 12 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows: Firm A B C Current earnings $ 2.50 $ 3.20 $ 6.60 Current dividend $ 1.40 $ 2.30 $ 7.50 Expected annual growth rate in 5 % 2 % -2 % dividends and earnings Current market price $ 29 $ 28 $ 59 What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % If the appropriate P/E ratio is 13, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the appropriate P/E ratio is 7, what…
Question content area top Part 1 (Common stock valuation) Assume the following: • the investor's required rate of return is 14.5 percent, • the expected level of earnings at the end of this year (E1) is $6, • the retention ratio is 40 percent, • the return on equity (ROE) is 14 percent (that is, it can earn 14 percent on reinvested earnings), and • similar shares of stock sell at multiples of 6.742 times earnings per share. Questions: a. Determine the expected growth rate for dividends. b. Determine the price earnings ratio (P/E1). c. What is the stock price using the P/E ratio valuation method? d. What is the stock price using the dividend discount model? e. What would happen to the P/E ratio (P/E1) and stock price if the company increased its retention rate to 80 percent (holding all else constant)? What would happen to the P/E ratio (P/E1) and stock price if the company paid out all its earnings in the form of dividends?…
VALUATION OF A CONSTANT GROWTH STOCK Investors require an 8% rate of return on Mather Companys stock (i.e., rs = 8%). a. What is its value if the previous dividend was D0 = 125 and investors expect dividends to grow at a constant annual rate of (1) 2%, (2) 0%, (3) 3%, or (4) 5%? b. Using data from part a, what would the Gordon (constant growth) model value be if the required rate of return was 8% and the expected growth rate was (1) 8% or (2) 12%? Are these reasonable results? Explain. c. Is it reasonable to think that a constant growth stock could have g rs? Why or why not?
VALUATION OF A CONSTANT GROWTH STOCK Investors require a 15% rate of return on Levine Companys stock that is, rs = 15%). a. What is its value if the previous dividend was D0 = 2 and investors expect dividends to grow at a constant annual rate of (1) 5%, (2) 0%, (3) 5%, or (4) 10%? b. Using data from Part a, what would the Gordon (constant growth) model value be if the required rate of return was 15% and the expected growth rate was (1) 15% or (2) 20%? Are these reasonable results? Explain. c. Is it reasonable to think that a constant growth stock could have g rs? Why or why not?
QUESTION 17 Find the intrinsic value of the stock that pays a dividend of $4.12 and has a growth rate of 11.5% for 4 years then it stabilizes at a long-run growth rate of 2.4%. The stock has a Beta of 1.12, the risk free rate is 4.0% and the market return is 6.12%. A. $75.68 B. $87.92 C. $122.11 D. $146.70
Question 7 The Amelia Knight investment fund has a total capital of R120 000 invested in three shares: SharesReturnInvestedTechnological Sector25%R60 000Education Sector13%R30 000Mining Sector20%R30 000 The current risk-free rate is 5,5%. Market returns have the following estimated probability distribution for the next period: ProbabilityMarket return0,3–10%0,1 14%0,2 15%0,4 18% What is the beta coefficient of the investment fund? 1. 0,52 2. 0,80 3. 1,82 4. 4,92
Question 3 You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a ¢1,000 investment in each stock under four different economic conditions has the following probability distribution: Returns Probability Economic Condition Stock X Stock Y 0.1 Recession -50 -100 0.3 Slow Growth 20 50 0.4 Moderate Growth 100 130 0.2 Fast Growth 150 200 (a) Which of the investments has a better return and why? (b) Which of the investments is relatively less risky and why? (c) What type of association exists between the two-investment options X and Y? Interpret your results.

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