CORP FIN (LL)+CONNECT+PROCTORIO+180
CORP FIN (LL)+CONNECT+PROCTORIO+180
12th Edition
ISBN: 9781266120343
Author: Ross
Publisher: MCG
Question
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Chapter 12, Problem 3QAP

a

Summary Introduction

Adequate information:

Beta of growth in GNP βGNP = 1.47

Beta of inflation βInf = -0.87

Expected value of growth in GNP EVGNP = 1.9%

Expected value of inflation EVInf = 3.2%

Actual value of growth in GNP AVGNP = 2.4%

Actual value of inflation AVInf = 3.6%

To compute: Systematic risk of the stock

Introduction: Systematic risk refers to the risk that is non-diversifiable that is inherent to the entire market.

b

Summary Introduction

Adequate information:

Old market share MSOld = 11%

New market share MSNew = 15%

Increase in stock return for every 1% increase in market share InSR = 0.58%

To compute: Unsystematic risk

Introduction: Unsystematic risk refers to the risk that is specific to a company. Such type of risks is diversifiable.

c

Summary Introduction

Adequate information:

Expected return on the stock ERS = 10.5%

Systematic risk m= 0.39%

Unsystematic risk ε= 2.32%

To compute: Total return on the stock

Introduction: Total return refers to the return that a stock earns after the consideration of all types of risks.

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A company currently pays a dividend of $3.6 per share (D0 = $3.6). It is estimated that the company's dividend will grow at a rate of 19% per year for the next 2 years, and then at a constant rate of 6% thereafter. The company's stock has a beta of 1.4, the risk-free rate is 8.5%, and the market risk premium is 4.5%. What is your estimate of the stock's current price? Do not round intermediate calculations. Round your answer to the nearest cent.
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