Question

Jersey Jewel Mining has a beta coefficient of 1.3. Currently the risk-free rate is 2 percent and the anticipated return on the market is 6 percent.

JJM pays a $4.20 dividend that is growing at 3 percent annually. Do not round intermediate calculations.

What is the required return for JJM? Round your answer to two decimal places. %

Given the required return, what is the value of the stock? Round your answer to the nearest cent. $

If the stock is selling for $134, what should you do? The stock -Select- overvalued and -Select- be purchased.

If the beta coefficient declines to 1.2, what is the new value of the stock? Round your answer to the nearest cent. $

If the price remains $134, what course of action should you take given the valuation in d? The stock is -Select- and -Select- be purchased.

Answer 1

1)

Required return = Risk free rate + beta(market return - risk free rate)

Required return = 2% + 1.3(6% - 2%)

Required return = 2% + 5.2%

Required return = 7.20%

2)

Next year dividend = Current dividend (1 + growth rate)

Next year dividend = 4.2 (1 + 3%)

Next year dividend = 4.326

Value of stock = Year 1 dividend / required rate - growth rate

Value of stock = 4.326 / 0.072 - 0.03

Value of stock = 4.326 / 0.042

Value of stock = $103.00

3)

The stock is Overvalued should be sold

4)

Required return = Risk free rate + beta(market return - risk free rate)

Required return = 2% + 1.2(6% - 2%)

Required return = 2% + 4.8%

Required return = 6.8%

Next year dividend = Current dividend (1 + growth rate)

Next year dividend = 4.2 (1 + 3%)

Next year dividend = 4.326

Value of stock = Year 1 dividend / required rate - growth rate

Value of stock = 4.326 / 0.068 - 0.03

Value of stock = 4.326 / 0.038

Value of stock = $113.84

5)

The stock is Overvalued should be sold