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.
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.
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.
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