The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 6 percent. Suppose the capital gains tax rate is zero, whereas the dividend tax rate is 30 percent. Gecko has an expected earnings growth rate of 21 percent annually and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

The Gecko Company and the Gordon Company are two firms whose business risk is the same but that have different dividend policies. Gecko pays no dividend, whereas Gordon has an expected dividend yield of 6 percent. Suppose the capital gains tax rate is zero, whereas the dividend tax rate is 30 percent. Gecko has an expected earnings growth rate of 21 percent annually and its stock price is expected to grow at this same rate. The aftertax expected returns on the two stocks are equal (because they are in the same risk class). What is the pretax required return on Gordon's stock? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

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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Some investors use the Sharpe ratio as a way of comparing the benefits of owning shares of stock in a company to the risks. The Sharpe ratio of a stock is defined as the ratio of the difference between the mean return on the stock and the mean return on government bonds (called the risk-free rate rf ) to the SD of the returns on the stock. The mean return on government bonds is rf = 0.03% per day. The table below describes the daily return of three stocks. Date APPLE. TESLA GM 01/10/20 0.85% 4.46% 2.67% 02/10/20 -3.23% - 7.38% 0.26% 05/10/20 3.08% 2.55% 1.64% 06/10/20 -2.87% -2.75% -1.81% 07/10/20 1.70% 2.73% 4.01% 08/10/20 -0.10% 0.15% 1.87% 09/10/20 1.74% 1.90% -0.16% 12/10/20 6.35% 1.91% 0.16% 13/10/20 -2.65% 0.98% -1.06% 14/10/20 0.07% 3.28% -0.63% 15/10/20 -0.40% -2.69% 2.90% 16/10/20 -1.40% -2.05%…
Suppose a stock pays a dividend of $3 per share each year, and you don’t expect that dividend to change. Using the zero-growth model answer the following: (a) If you want a 10% return on your investment, how much should you be willing to pay for the stock? (b) The Fed cut the interest rate by 2%, causing the required investment return drop to 8%. What’s the value of a share of stock?
Two stocks each currently pay a dividend of $1.90 per share. It is anticipated that both firms’ dividends will grow annually at the rate of 6 percent. Firm A has a beta coefficient of 1.08 while the beta coefficient of firm B is 0.83. If U.S. Treasury bills currently yield 2.4 percent and you expect the market to increase at an annual rate of 8.2 percent, what are the valuations of these two stocks using the dividend-growth model? Do not round intermediate calculations. Round your answers to two decimal places. Stock A: $ Stock B: $ Why are your valuations different? The beta coefficient of (stock A or stock B) is higher, which indicates the stock's return is (less or more ) volatile. If stock A’s price were $55 and stock B’s price were $46, what would you do? Stock A is - (undervalued or overvalued) Iand (should or Should not) be purchased. Stock B is (undervalued or overvalued) and (should orshould notI) be purchased.
A firm recently paid a dividend of $2.05 per share, but analysts expect the dividend to decrease by 6% per year. The risk free rate is 1.5% and the market risk premium is 7%. If its beta is 2.25 and the market is in equilibrium what is the value of the stock? (explain your answer) $19.32 $8.82 $11.17 $8.29
Consider two firms, Rosehill Corporation and Purwell Industries that are each expected to pay the same $2.5 million dollar dividend every year in perpetuity. Rosehill Corporation is riskier and has an equity cost of capital of 15%. Purwell Industries is not as shaky as Rosehill, so Purwell has an equity cost of capital of only 10%. Assume that the market portfolio is not efficient. Both stocks have the same beta and an expected return of 13%. The alpha for Rosehill is closest to: 3% -3% -2% 2%
Mining has seen its business slowly wind down. It recently paid a dividend of $1.80 per share (D0), but analysts expect the dividend to decrease by 6% per year. The risk-free rate is 4.0% and the market risk premium is 5.0%. If the company beta is 0.8 and the market is in equilibrium, what is the value of its stock? $13.97 $11.79 $16.04 $12.09 $10.90
Engler Corporation's stock had a required return of 9.50% last year when the risk - free rate was 2.50% and the market risk premium was 5.00%. Then an increase in investor risk aversion caused the market risk premium to rise by 1% from 5.00% to 6.00%. The risk-free rate and the firm's beta remain unchanged. What is the company's new required rate of return? a. 10.40% b 10.90% с. 11.80% d. 12.50% e. 13.50%
M&M Corporation just paid a dividend of $1.55. It is expected to increase its dividend by 2% per year. B&B Corporation is expected to pay a $2.55 dividend in one year. It is expected to grow at 4% per year. The market requires a return of 12% on assets at similar risk level., a) What is the stock price of M&M Corporation? b) What is the stock price of B&B Corporation?
Schnusenberg Corporation just paid a dividend of DO $2.10 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 2.00, the required return on the market is 14.50%, and the risk - free rate is 4.50%. What is the company's current stock price? Do not round intermediate calculations. a. $12.43 b. $11.67 c. $9.13 d. $27.96 e. $34.41 =
Suppose the risk-free rate is 3.91% and an analyst assumes a market risk premium of 6.52%. Firm A just paid a dividend of $1.11 per share. The analyst estimates the β of Firm A to be 1.20 and estimates the dividend growth rate to be 4.27% forever. Firm A has 264.00 million shares outstanding. Firm B just paid a dividend of $1.83 per share. The analyst estimates the β of Firm B to be 0.70 and believes that dividends will grow at 2.86% forever. Firm B has 197.00 million shares outstanding. What is the value of Firm B? Answer format: Currency: Round to: 2 decimal places.
NewLinePhone Corp. is very risky, with a beta equal to 2.8 and a standard deviation of returns of 32%. The risk-free rate of return is 3% and the market risk premium is 8%. NewLinePhone's marginal tax rate is 35%. Use the capital asset pricing model (CAPM) to estimate NewLinePhone's cost of retained earnings. (*You must show your calculation process as well.)

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