The risk-free rate of return is 2 percent, and the expected return on the market is 6.1 percent. Stock A has a beta coefficient of 1.3, an earnings and dividend growth rate dividend of $1.50 a share. Do not round intermediate calculations. Round your answers to the nearest cent. a. What should be the market price of the stock? $ b. If the current market price of the stock is $81.00, what should you do? The stock -Select- ✓be purchased. c. If the expected return on the market rises to 14.1 percent and the other variables remain constant, what will be the value of the stock? $ d. If the risk-free return rises to 5 percent and the return on the market rises to 14.3 percent, what will be the value of the stock? $ e. If the beta coefficient falls to 1.2 and the other variables remain constant, what will be the value of the stock?
The risk-free rate of return is 2 percent, and the expected return on the market is 6.1 percent. Stock A has a beta coefficient of 1.3, an earnings and dividend growth rate dividend of $1.50 a share. Do not round intermediate calculations. Round your answers to the nearest cent. a. What should be the market price of the stock? $ b. If the current market price of the stock is $81.00, what should you do? The stock -Select- ✓be purchased. c. If the expected return on the market rises to 14.1 percent and the other variables remain constant, what will be the value of the stock? $ d. If the risk-free return rises to 5 percent and the return on the market rises to 14.3 percent, what will be the value of the stock? $ e. If the beta coefficient falls to 1.2 and the other variables remain constant, what will be the value of the stock?
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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Transcribed Image Text:The risk-free rate of return is 2 percent, and the expected return on the market is 6.1 percent. Stock A has a beta coefficient of 1.3, an earnings and dividend growth rate of 5 percent, and a current
dividend of $1.50 a share. Do not round intermediate calculations. Round your answers to the nearest cent.
a. What should be the market price of the stock?
$
b. If the current market price of the stock is $81.00, what should you do?
The stock -Select- ✓ be purchased.
c. If the expected return on the market rises to 14.1 percent and the other variables remain constant, what will be the value of the stock?
$
d. If the risk-free return rises to 5 percent and the return on the market rises to 14.3 percent, what will be the value of the stock?
$
e. If the beta coefficient falls to 1.2 and the other variables remain constant, what will be the value of the stock?
$
f. Explain why the stock's value changes in c through e.
The increase in the return on the market -Select- ✓the required return and [-Select- ✓the value of the stock.
The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to -Select-
The decrease in the beta coefficient causes the firm to become [-Select- risky as measured by beta, which (-Select- ✓the value of the stock.
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