# Question: The risk free rate of return is 3 percent and the

The risk-free rate of return is 3 percent, and the expected return on the market is 8.7 percent. Stock A has a beta coefficient of 1.4, an earnings and dividend growth rate of 5 percent, and a current dividend of $2.60 a share.

a. What should be the market price of the stock?

b. If the current market price of the stock is $27, what should you do?

c. 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?

d. If the risk-free return rises to 4.5 percent and the return on the market rises to 10.2 percent, what will be the value of the stock?

e. If the beta coefficient falls to 1.1 and the other variables remain constant, what will be the value of the stock?

f. Explain why the stock’s value changes in c through e.

a. What should be the market price of the stock?

b. If the current market price of the stock is $27, what should you do?

c. 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?

d. If the risk-free return rises to 4.5 percent and the return on the market rises to 10.2 percent, what will be the value of the stock?

e. If the beta coefficient falls to 1.1 and the other variables remain constant, what will be the value of the stock?

f. Explain why the stock’s value changes in c through e.

## Answer to relevant Questions

The security market line is estimated to be k = 5% 1 110.4% - 5%2b. You are considering two stocks. The beta of A is 1.4. The firm offers a dividend yield during the year of 4 percent and a growth rate of 7 percent. The beta ...A bond with 15 years to maturity has a semiannual interest payment of $40. If the bond sells for its par value, what are the bond's current yield and yield to maturity? You are given the following information concerning a noncallable, sinking fund debenture: • Principal: $1,000 • Coupon rate of interest: 7 percent • Term to maturity: 15 years • Sinking fund: 5 percent of outstanding ...You sold a stock for $50 that you purchased five years earlier for $24. What was the holding period return? Prove that this return overstates the annualized, compound return. If an investor buys shares in a no-load mutual fund for $30 and after five years the shares appreciate to $50, what is (1) the percentage return and (2) the annual compound rate of return using time value of money?Post your question