Question

In: Finance

The risk-free rate of return is 4 percent, and the expected return on the market is...

The risk-free rate of return is 4 percent, and the expected return on the market is 8.2 percent. Stock A has a beta coefficient of 1.6, an earnings and dividend growth rate of 6 percent, and a current dividend of $2.20 a share. Do not round intermediate calculations. Round your answers to the nearest cent.

What should be the market price of the stock? $

If the current market price of the stock is $32.00, what should you do? The stock -Select- be purchased.

If the expected return on the market rises to 10 percent and the other variables remain constant, what will be the value of the stock? $

If the risk-free return rises to 6 percent and the return on the market rises to 10.3 percent, what will be the value of the stock? $

If the beta coefficient falls to 1.3 and the other variables remain constant, what will be the value of the stock? $

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.

Solutions

Expert Solution

1.
=2.20*1.06/(4%+1.6*(8.2%-4%)-6%)
=49.4068

2.
Should

3.
=2.20*1.06/(4%+1.6*(10%-4%)-6%)
=30.6842

4.
=2.20*1.06/(6%+1.6*(10.3%-6%))
=18.1056

5.
=2.20*1.06/(4%+1.3*(8.2%-4%)-6%)
=67.3988

6.
The increase in the return on the market increases the required return and decreases 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 decrease. The decrease in the beta coefficient causes the firm to become less risky as measured by beta, which increases the value of the stock.


Related Solutions

The risk-free rate of return is 4 percent, and the expected return on the market is...
The risk-free rate of return is 4 percent, and the expected return on the market is 7.5 percent. Stock A has a beta coefficient of 1.6, an earnings and dividend growth rate of 8 percent, and a current dividend of $2.10 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 $118.00, what should you do?...
The risk-free rate of return is 2 percent, and the expected return on the market is...
The risk-free rate of return is 2 percent, and the expected return on the market is 7.1 percent. Stock A has a beta coefficient of 1.6, an earnings and dividend growth rate of 5 percent, and a current dividend of $3.20 a share. Do not round intermediate calculations. Round your answers to the nearest cent. $   The stock -Select-shouldshould not be purchased. $   $   $   The increase in the return on the market -Select-increasesdecreases the required return and -Select-increasesdecreases the...
The risk-free rate of return is 2 percent, and the expected return on the market is...
The risk-free rate of return is 2 percent, and the expected return on the market is 7.8 percent. Stock A has a beta coefficient of 1.7, an earnings and dividend growth rate of 7 percent, and a current dividend of $3.00 a share. Do not round intermediate calculations. Round your answers to the nearest cent. What should be the market price of the stock? $ _____ If the current market price of the stock is $87.00, what should you do?...
The expected return on the market is 11.44 percent, the risk-free rate is 3.82 percent, and...
The expected return on the market is 11.44 percent, the risk-free rate is 3.82 percent, and the tax rate is 40 percent.  Fairfax Paint has 1,400,000 common shares outstanding that are priced at 35 dollars per share and have an expected return of 19.32 percent and an expected real return of 17.53 percent. Last year, Fairfax Paint common stock had a return of 20.66 percent. The company also has 400,000 shares of preferred stock outstanding that are priced at 20 dollars...
The market is expected to generate a 12% return and the risk free rate is 4%....
The market is expected to generate a 12% return and the risk free rate is 4%. A portfolio manager has 70% of her capital allocated to stock A with a beta of 0.8, which generated a total return of 11%. 30% of her capital is allocated to stock B with a beta of 1.1, which generated a total return of 12%. What Alpha was generated by the manager by allocating more capital to stock A? Multiple Choice 0.25% 0.38% 0.18%...
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect...
The risk-free rate is 4%. The expected market rate of return is 11%. If you expect CAT with a beta of 1.0 to offer a rate of return of 11%, you should: buy CAT because it is overpriced sell short CAT because it is overpriced sell stock short CAT because it is underpriced buy CAT because it is underpriced hold CAT because it is fairly priced
Assume the risk-free rate is 4% (rf = 4%), the expected return on the market portfolio...
Assume the risk-free rate is 4% (rf = 4%), the expected return on the market portfolio is 12% (E[rM] = 12%) and the standard deviation of the return on the market portfolio is 16% (σM = 16%). (All numbers are annual.) Assume the CAPM holds. *PLEASE HELP WITH E-H; INCLUDED ADDITIONAL QUESTIONS FOR REFERENCE* 1a. What are the expected returns on securities with the following betas: (i) β = 1.0, (ii) β = 1.5, (iii) β = 0.5, (iv) β...
1. Consider the CAPM. The risk-free rate is 4%, and the expected return on the market...
1. Consider the CAPM. The risk-free rate is 4%, and the expected return on the market is 18%. What is the expected return on a stock with a beta of 1.2? A. 6% B. 15.6% C. 18% D. 20.8% 2. The CAL provided by combinations of 1-month T-bills and a broad index of common stocks (i.e. market portfolio) is called the ______. A. SML B. CAPM C. CML D. total return line
Suppose the risk-free rate is 5.2 percent and the market portfolio has an expected return of...
Suppose the risk-free rate is 5.2 percent and the market portfolio has an expected return of 11.9 percent. The market portfolio has a variance of .0482. Portfolio Z has a correlation coefficient with the market of .38 and a variance of .3385 According to the capital asset pricing model, what is the expected return on Portfolio Z? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)      Expected return ????? %
The risk-free rate of return is 6%, the expected rate of return on the market portfolio...
The risk-free rate of return is 6%, the expected rate of return on the market portfolio is 15%, and the stock of Xyrong Corporation has a beta coefficient of 2.3. Xyrong pays out 45% of its earnings in dividends, and the latest earnings announced were $9.00 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 18% per year on all reinvested earnings forever. a. What is the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT