Suppose TRF = 6%, TM = 11%, and bi = 1.2. a. What is ri, the required rate of return on Stock i? Round your answer to one decimal place. 12 % b. 1. Now suppose TRF increases to 7%. The slope of the SML remains constant. How would this affect rm and r? I. Both rm and r will increase by 1 percentage point. II. rm will remain the same and will increase by 1 percentage point. III. rM will increase by 1 percentage point and r₁ will remain the same. IV. Both TM and will decrease by 1 percentage point. V. Both rm and r₁ will remain the same. I + 2. Now suppose TRF decreases to 5%. The slope of the SML remains constant. How would this affect rm and n? I. Both rm and n will increase by 1 percentage point. II. Both rm and r will remain the same. III. Both rm and r₁ will decrease by 1 percentage point. IV. rM will decrease by 1 percentage point and r₁ will remain the same. V. rm will remain the same and r₁ will decrease by 1 percentage point. III + c. 1. Now assume that rRF remains at 6%, but rM increases to 12%. The slope of the SML does not remain constant. How would thes changes affect r₁? Round your answer to one decimal place. The new r₁ will be %. 2. Now assume that rRF remains at 6%, but rm falls to 10%. The slope of the SML does not remain constant. How would these changes affect r₁? Round your answer to one decimal place. The new r₁ will be %.
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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