Suppose the risk-free rate of return is 4.5 percent and the market risk premium is 9 percent. Stock U, which has a beta coefficient equal to 1.2, is currently selling for $39 per share. Thecompany is expected to grow at a 4 percent rate forever, and the most recent dividend paid to stockholders was $3.50 per share. Is Stock U correctly priced? Explain. Do not roundintermediate calculations. Round your answers to one decimal place.The required rate of return, that is14.7%, is -Select-Hide Feedback-Select-greater thanlower thanequal tothe expected rate of return, that is%, which means that the selling price is too high

Assessing Stock U's Valuation: A Closer Look with Confidence and Limitations We analyzed the…

Answered: Suppose the risk-free rate of return is…

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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The next dividend payment by JM, Incorporated, will be $3.00 per share. The dividends are anticipated to maintain a growth rate of 4.25 percent forever. If the stock currently sells for $49.60 per share, What is the required return? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Required return %
Suppose GDL just paid a dividend of $2 and the required return on the stock is 10%. What growth rate must investors expect if the stock currently sells for $53? Answer to 4 decimal places, for example 0.1234. 9.6364
Suppose rRF = 4%, rM = 11%, and bi = 1.5. What is ri, the required rate of return on Stock i? Round your answer to two decimal places. % 1. Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will decrease by 1%. Both rM and ri will remain the same. Both rM and ri will increase by 1%. rM will remain the same and ri will increase by 1%. rM will increase by 1% and ri will remain the same.
The stock of Business Adventures sells for $30 a share. Its likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows: Boom Normal economy Recession Dividend $ 2.00 1.40 0.50 Required: a. Calculate the expected holding-period return and standard deviation of the holding-period return. All three scenarios are equally likely. (Do not round intermediate calculations. Round your answers to 2 decimal places.) Expected return Standard deviation Answer is complete and correct. Stock Price $ 40 34 25 14.33 22.60 Expected return Standard deviation b. Calculate the expected return and standard deviation of a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 5%. (Do not round intermediate calculations. Round your answers to 2 decimal places.) % % Answer is complete but not entirely correct. 8.75 11.30 % %
Investors require a 17% rate of return on Levine Company's stock (i.e., rs = 17%) A. What is its value if the previous dividend was D0 = $1.75 and investors expect dividends to grow at a constant annual rate of (1) -6%, (2) 0%, (3) 3%, or (4) 12%? Do not round intermediate calculations. Round your answers to two decimal places.
Suppose rRF = 4%, rM = 13%, and bi = 1.1. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. % 1. Now suppose rRF increases to 5%. The slope of the SML remains constant. How would this affect rM and ri? Both rM and ri will remain the same. Both rM and ri will increase by 1 percentage point. rM will remain the same and ri will increase by 1 percentage point. rM will increase by 1 percentage point and ri will remain the same. Both rM and ri will decrease by 1 percentage point. 2. Now suppose rRF decreases to 3%. The slope of the SML remains constant. How would this affect rM and ri? rM will remain the same and ri will decrease by 1 percentage point. Both rM and ri will increase by 1 percentage point. Both rM and ri will remain the same. Both rM and ri will decrease by 1 percentage point. rM will decrease by 1 percentage point and ri will remain the same. 1. Now assume that rRF remains at 4%, but rM increases to 14%.…
Jersey Jewel Mining has a beta coefficient of 1.5. Currently the risk-free rate is 4 percent and the anticipated return on the market is 6 percent. JJM pays a $5.00 dividend that is growing at 3 percent annually. Do not round intermediate calculations. What is the required return for JJM? Round your answer to two decimal places. % Given the required return, what is the value of the stock? Round your answer to the nearest cent. $ If the stock is selling for $159, what should you do? The stock overvalued and be purchased. If the beta coefficient declines to 1.2, what is the new value of the stock? Round your answer to the nearest cent. $ If the price remains $159, what course of action should you take given the valuation in d? The stock is and be purchased.
Orwell building supplies' last dividend was $1.80. Its dividend growth rate is expected to be constant at 20% for 2 years, after which dividends are expected to grow at a rate of 7% forever. Its required return (rs) is 12%. What is the best estimate of the current stock price? Note: Do not round intermediate calculations. (Round your answer to 2 decimal places.)
7) see picture
Suppose rRF = 6%, rM = 12%, and bi = 1.1. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. % 1. Now suppose rRF increases to 7%. The slope of the SML remains constant. How would this affect rM and ri? rM will remain the same and ri will increase by 1 percentage point. rM will increase by 1 percentage point and ri will remain the same. Both rM and ri will decrease by 1 percentage point. Both rM and ri will remain the same. Both rM and ri will increase by 1 percentage point. 2. Now suppose rRF decreases to 5%. The slope of the SML remains constant. How would this affect rM and ri? rM will remain the same and ri will decrease by 1 percentage point. Both rM and ri will increase by 1 percentage point. Both rM and ri will remain the same. Both rM and ri will decrease by 1 percentage point. rM will decrease by 1 percentage point and ri will remain the same. 1. Now assume that rRF remains at 6%, but rM increases to 13%.…
Carnes Cosmetics Co.'s stock price is $45, and it recently paid a $2.00 dividend. This dividend is expected to grow by 25% for the next 3 years, then grow forever at a constant rate, g; and rs = 16%. At what constant rate is the stock expected to grow after Year 3? Do not round intermediate calculations. Round your answer to two decimal places. (Please correct answer this question)
Beasley Ball Bearings paid a $4 dividend last year. The dividend is expected to grow at a constant rate of 5 percent over the next four years. The required rate of return is 12 percent (this will also serve as the discount rate in this problem). Use Appendix B for an approximate answer but calculate your final answer using the formula and financial calculator methods. e. Compute the current value of the stock. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) f. Use the formula given below to show that it will provide approximately the same answer as part e. (Do not round intermediate calculations. Round your final answer to 2 decimal places.) P0 = D1 Ke − g g. If current EPS were equal to $5.51 and the P/E ratio is 20% higher than the industry average of 10, what would the stock price be? (Do not round intermediate calculations. Round your final answer to 2 decimal places.) h. By what dollar amount is the stock price…

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