(Stock Valuation) Today's date is Monday, January 3, 2022. The following information pertains to the stocks of two fictitious companies, ABC and DEF on January 3, 2022. ABC Corp. Current price on 1/3/2022 Most recent dividend on 12/31/2021 Expected dividend growth rate $50 $10 4% 0.5 4% 4% 7% 0 explain. DEF Corp. $730 N/A (Never Paid) Beta 1-Year Price Change Dividend Yield Standard Deviations of Returns Correlation of ABC and DEF returns The long-term Treasury yield is 3%, and the historical average market return is 12%. (a) Calculate the required rate of return of the stock ABC. (b) Assessing from the dividend stream, is ABC undervalued or overvalued? Show your work and 1.9 22.5% N/A 50% (c) Calculate total annual return from the stock. Assessing from the total annual return, is ABC undervalued or overvalued? Show your work and explain. (d) Suppose the Federal Reserve raises the Fed Funds Rate, how would this affect your valuation of ABC? Explain. (e) Your colleague suggests that you should invest only in ABC, and no part in DEF, to minimize the risks. Is this true or false? Explain verbally. (f) Assessing from the dividend stream, is DEF undervalued or overvalued? Briefly explain.
(Stock Valuation) Today's date is Monday, January 3, 2022. The following information pertains to the stocks of two fictitious companies, ABC and DEF on January 3, 2022. ABC Corp. Current price on 1/3/2022 Most recent dividend on 12/31/2021 Expected dividend growth rate $50 $10 4% 0.5 4% 4% 7% 0 explain. DEF Corp. $730 N/A (Never Paid) Beta 1-Year Price Change Dividend Yield Standard Deviations of Returns Correlation of ABC and DEF returns The long-term Treasury yield is 3%, and the historical average market return is 12%. (a) Calculate the required rate of return of the stock ABC. (b) Assessing from the dividend stream, is ABC undervalued or overvalued? Show your work and 1.9 22.5% N/A 50% (c) Calculate total annual return from the stock. Assessing from the total annual return, is ABC undervalued or overvalued? Show your work and explain. (d) Suppose the Federal Reserve raises the Fed Funds Rate, how would this affect your valuation of ABC? Explain. (e) Your colleague suggests that you should invest only in ABC, and no part in DEF, to minimize the risks. Is this true or false? Explain verbally. (f) Assessing from the dividend stream, is DEF undervalued or overvalued? Briefly explain.
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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Question a b, and c please
Transcribed Image Text:---
### Stock Valuation Exercise
**Today's date:** Monday, January 3, 2022.
**Objective:** Analyze the information pertaining to the stocks of two fictitious companies, ABC and DEF, as provided below.
#### Company Information (as of January 3, 2022)
| Metric | ABC Corp. | DEF Corp. |
|--------------------------------------------|-----------|------------|
| Current price on 1/3/2022 | $50 | $730 |
| Most recent dividend on 12/31/2021 | $10 | N/A (Never Paid) |
| Expected dividend growth rate | 4% | N/A |
| Beta | 0.5 | 1.9 |
| 1-Year Price Change | 4% | 22.5% |
| Dividend Yield | 4% | N/A |
| Standard Deviations of Returns | 7% | 50% |
| Correlation of ABC and DEF returns | 0 | |
The **long-term Treasury yield** is 3%, and the historical average market return is 12%.
#### Questions for Analysis
(a) **Calculate the required rate of return of the stock ABC.**
(b) **Assessing from the dividend stream, is ABC undervalued or overvalued? Show your work and explain.**
(c) **Calculate total annual return from the stock. Assessing from the total annual return, is ABC undervalued or overvalued? Show your work and explain.**
(d) **Suppose the Federal Reserve raises the Fed Funds Rate, how would this affect your valuation of ABC? Explain.**
(e) **Your colleague suggests that you should invest only in ABC, and no part in DEF, to minimize the risks. Is this true or false? Explain verbally.**
(f) **Assessing from the dividend stream, is DEF undervalued or overvalued? Briefly explain.**
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### Detailed Graph and Diagram Explanation
- **Table:**
- **Rows:**
- **Current price on 1/3/2022:** Lists the stock price for both companies as of January 3, 2022.
- **Most recent dividend on 12/31/2021:** Provides the most recent dividends paid out by the companies.
- **Expected dividend growth rate:**
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