Two stocks each pay a $1 dividend that is growing annually at 4 percent. Stock A's beta = 1.3; stock B's beta = 0.8. a. Which stock is more volatile? b. If Treasury bills yield 2 percent and you expect the market to rise by 8 percent, what is your risk-adjusted required return for each stock? c. Using the dividend-growth model, what is the maximum price you would be willing to pay for each stock? d. Why are their valuations different?
Two stocks each pay a $1 dividend that is growing annually at 4 percent. Stock A's beta = 1.3; stock B's beta = 0.8. a. Which stock is more volatile? b. If Treasury bills yield 2 percent and you expect the market to rise by 8 percent, what is your risk-adjusted required return for each stock? c. Using the dividend-growth model, what is the maximum price you would be willing to pay for each stock? d. Why are their valuations different?
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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Two stocks each pay a $1 dividend that is growing annually at 4 percent. Stock A's beta = 1.3; stock B's beta = 0.8.
a. Which stock is more volatile?
b. If Treasury bills yield 2 percent and you expect the market to rise by 8 percent, what is your risk-adjusted required return for each stock?
c. Using the dividend-growth model, what is the maximum price you would be willing to pay for each stock?
d. Why are their valuations different?
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