The current risk-free rate is 3 percent and the market risk premium is 5 percent. You are trying to value ABC company and it has an equity beta of 0.9. The company earned $3.00 per share in the year that just ended. You expect the company's earnings to grow S percent per year. The company has an ROE of 14 percent. a. What is the value of the stock? Do not round intermediate calculations. Round your answer to the nearest cent. %24 b. What is the present value of the growth opportunity? Do not round intermediate calculations. Round your answer to the nearest cent.

The current risk-free rate is 3 percent and the market risk premium is 5 percent. You are trying to value ABC company and it has an equity beta of 0.9. The company earned $3.00 per share in the year that just ended. You expect the company's earnings to grow S percent per year. The company has an ROE of 14 percent. a. What is the value of the stock? Do not round intermediate calculations. Round your answer to the nearest cent. %24 b. What is the present value of the growth opportunity? Do not round intermediate calculations. Round your answer to the nearest cent.

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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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

The current risk-free rate is 3 percent and the market risk premium is 5 percent. You are trying to value ABC company and it has an equity beta of 0.9.
The company earned $3.00 per share in the year that just ended. You expect the company's earnings to grow 5 percent per year. The company has an
ROE of 14 percent.
a. What is the value of the stock? Do not round intermediate calculations. Round your answer to the nearest cent.
b. What is the present value of the growth opportunity? Do not round intermediate calculations. Round your answer to the nearest cent.

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