Micah is investing in the stocks of the company KNS. KNS just paid a dividend of...

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Micah is investing in the stocks of the company KNS. KNS just paid a dividend of $1 per share (Do = 1). Micah expects the dividend growth rate to be -10% for Year One and 5% for Year Two. Afterwards, Micah believes the growth rate to be constant at g forever. Micah uses CAPM model to determine the discount rate (expected rate of return). And he calculates the following: E(rm) = 6%, rf = 1%, and BKNS = 0.6. (a) If g 3%, what is Micah's estimate of the current price using the Dividend Discount Model? [3 points] = (b) Suppose that the current price of KNS is $120 and Micah decides to short sell 100 shares of KNS stock using margin. The initial margin requirement is 50%. How much does Micah have to deposit into the margin account? [1 point] (c) If the price goes up to $140 per share and the maintenance margin is 35%, will Micah receive a margin call? [1 point] (d) Suppose Micah receives a margin call under 2(c) What is the minimum amount of cash that Micah can use to bring the margin back to 35%? [4 points] Micah is investing in the stocks of the company KNS. KNS just paid a dividend of $1 per share (Do = 1). Micah expects the dividend growth rate to be -10% for Year One and 5% for Year Two. Afterwards, Micah believes the growth rate to be constant at g forever. Micah uses CAPM model to determine the discount rate (expected rate of return). And he calculates the following: E(rm) = 6%, rf = 1%, and BKNS = 0.6. (a) If g 3%, what is Micah's estimate of the current price using the Dividend Discount Model? [3 points] = (b) Suppose that the current price of KNS is $120 and Micah decides to short sell 100 shares of KNS stock using margin. The initial margin requirement is 50%. How much does Micah have to deposit into the margin account? [1 point] (c) If the price goes up to $140 per share and the maintenance margin is 35%, will Micah receive a margin call? [1 point] (d) Suppose Micah receives a margin call under 2(c) What is the minimum amount of cash that Micah can use to bring the margin back to 35%? [4 points]

Answer rating: 100% (QA)

a Given D0 1 g1 10 01 g2 5 005 g 3 003 Erm 6 rf 1 KNS 06 Using the CAPM model ke rf Erm rf 1 06... View the full answer