Earlier today, you bought 79 shares of Blamey Enterprises common stock for a total of $4,500. The
Question:
Earlier today, you bought 79 shares of Blamey Enterprises’ common stock for a total of $4,500. The stock pays annual cash dividends. You expect the next three dividends to be $1.59, $1.12, and $2.57 per share - paid one, two, and three years from today, respectively. Based on the stock’s risk, you’ve estimated the fair discount rate to be 10% per year. As you initially planned, you ultimately held the stock for two years (collecting two dividends), and then sold the stock immediately after collecting the second dividend. In doing so, you earned an IRR of 9.99% - when measured as an effective annual rate (EAR). Determine the price you sold the stock for, two years from today. Provide an answer with at least 4 digits of precision.
b) Using an expected return of 9.1% per year, you recently estimated the fair value of Zenon-5 common stock to be $47.74 per share. You also noticed that the stock is currently trading at a price of $35.52 per share. Given the expected annuity stream of cash dividends, and the current trading price of the stock, you’ve estimated that if the stock was purchased today and held for 8 years, the IRR would be 12% per year. Determine the degree of mispricing – as a percentage - associated with the stock. Provide an answer as a percentage, not as a decimal, with at least 4 digits of precision.
c) Suppose you currently own a two-asset portfolio consisting of Stocks A and B. You’ve estimated the beta of Stock A to be 0.76, and of Stock B to be 0.64. Based on today’s trading prices, you currently have $3,591 invested in Stock A, and $5,415 invested in Stock B. The expected return of the broad stock-market is estimated to be 9.3% per year. One-year US Treasury bonds are currently quoted (in the standard quoting convention) as 97:18. You seek to identify an improved portfolio which has the same expected return as your current portfolio, but has the lowest possible level of total risk. In doing so, you plan to liquidate (sell) your current portfolio, and reinvest 100% of the proceeds in the improved portfolio. When constructing the improved portfolio, how much money (if any) should you invest in the broad stock-market portfolio? NOTE: If the broad stock-market portfolio is not part of the improved portfolio, then answer zero. Provide an answer using at least 4 digits of precision.
