II. ABC Co pays dividends to its share holders monthly and company's current dividend per share...
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II. ABC Co pays dividends to its share holders monthly and company's current dividend per share is $0.25. ABC's dividend per share is expected to grow at the same rate per month indefinitely and its current share price is $20. The risk free rate has always been 0.8% per month and will remain at same level. A market model regression of ABC's monthly stock return on the market's monthly return has a slope coefficient of 1.2. The expected monthly return on the market portfolio is 1.3% and its standard deviation is 0.9%. a) Suppose the CAPM holds. 1. What is the intercept of the market model regression of ABC's monthly stock return on the market's monthly return? 2. What is the expected monthly returm on ABC's equity? 3. What is expected dividend growth rate for ABC? b) Suppose instead that the CAPM holds and investors care about {E[R-(t)], o[R»(t)], TERM(t)} where TERM(t) is the difference between the yield on a long term bond and the yield on a short term bond at the end of month t. The following information is available (the table also summarizes some information already presented): E[R:(t)] 1.3% Bi TERM i BiM M ? 0.5 АВС ? 1.2 0.7 QV 1.1% 0.9 0.2 where: BiMis the slope coefficient from the regression of asset i's monthly retum on the market portfolio's monthly return: R:(t) = dM+ BiM RM(t) + eiM(t); and, B.TERM is the slope coefficient from the regression of asset i's monthly return in month t on TERM(t) (a time series regression): R:(t) = di, TERM + BLTERM TERM(t) + e TERM(t). 1. What is BM,M? 2. What is the expected return on ABC 3. What is the intercept of the market model regression of ABC's monthly returm on the market's monthly return (i.e., what is aABC,M ?)? 4. Is there any reason for not using the constant growth dividend discount model in this setting? II. ABC Co pays dividends to its share holders monthly and company's current dividend per share is $0.25. ABC's dividend per share is expected to grow at the same rate per month indefinitely and its current share price is $20. The risk free rate has always been 0.8% per month and will remain at same level. A market model regression of ABC's monthly stock return on the market's monthly return has a slope coefficient of 1.2. The expected monthly return on the market portfolio is 1.3% and its standard deviation is 0.9%. a) Suppose the CAPM holds. 1. What is the intercept of the market model regression of ABC's monthly stock return on the market's monthly return? 2. What is the expected monthly returm on ABC's equity? 3. What is expected dividend growth rate for ABC? b) Suppose instead that the CAPM holds and investors care about {E[R-(t)], o[R»(t)], TERM(t)} where TERM(t) is the difference between the yield on a long term bond and the yield on a short term bond at the end of month t. The following information is available (the table also summarizes some information already presented): E[R:(t)] 1.3% Bi TERM i BiM M ? 0.5 АВС ? 1.2 0.7 QV 1.1% 0.9 0.2 where: BiMis the slope coefficient from the regression of asset i's monthly retum on the market portfolio's monthly return: R:(t) = dM+ BiM RM(t) + eiM(t); and, B.TERM is the slope coefficient from the regression of asset i's monthly return in month t on TERM(t) (a time series regression): R:(t) = di, TERM + BLTERM TERM(t) + e TERM(t). 1. What is BM,M? 2. What is the expected return on ABC 3. What is the intercept of the market model regression of ABC's monthly returm on the market's monthly return (i.e., what is aABC,M ?)? 4. Is there any reason for not using the constant growth dividend discount model in this setting?
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ANSWERS 1 BMM 12 2 The expected return on ABC is 12 07 19 3 The intercept of the market ... View the full answer
Related Book For
Financial and Managerial Accounting the basis for business decisions
ISBN: 978-0078025778
17th edition
Authors: Jan Williams, Susan Haka, Mark Bettner, Joseph Carcello
Posted Date:
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