CFIN -STUDENT EDITION-TEXT
6th Edition
ISBN: 9781337407359
Author: BESLEY
Publisher: CENGAGE L
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Chapter 8, Problem 11PROB
Summary Introduction
Portfolio beta is used to measure the portfolio’s overall systematic risk of an investment which equals the weighted average of all individual stock’s beta coefficient in a portfolio.
The total value of five stocks is $40,000 and the beta coefficient of portfolio is 1.2. The investment in stock 6 is $10,000 and its beta coefficient is 2.2.
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Problem Three (15 marks)
You are an analyst in charge of valuing common stocks. You have been asked to value two stocks. The first stock NEWER Inc. just paid a dividend of $6.00. The dividend is expected to increase by 60%, 45%, 30% and 15% per year, respectively, in the next four years. Thereafter, the dividend will increase by 4% per year in perpetuity.
Calculate NEWER’s expected dividend for t = 1, 2, 3, 4 and 5.
The required rate of return for NEWER stock is 14% compounded annually.
What is NEWER’s stock price?
The second stock is OLDER Inc. OLDER Inc. will pay its first dividend of $10.00 three (3) years from today. The dividend will increase by 30% per year for the following four (4) years after its first dividend payment. Thereafter, the dividend will increase by 3% per year in perpetuity.
Calculate OLDER’s expected dividend for t = 1, 2, 3, 4, 5, 6, 7 and 8.
The required rate of return for OLDER stock is 16% compounded annually.
What is OLDER’s stock price?
Now assume that…
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