1. Recife Corporation stock has a Beta of 1.39 and it will pay adividend of $1.50 next year. The following table shows the variouspossible economic conditions.

State of the economy for the nextyear__________Probability___________Expected return of themarket

Good_____________________________________40%_______________________15%

Fair______________________________________30%________________________10%

Poor_____________________________________30%_________________________0%

The current riskless rate is 5%. The expected long-term rate ofgrowth of Recife is 8%. Find the value of its common stock. Hint :assume that the predictions of the economy are short-term, perhapsover the next year. Also, assume that the growth of the dividendsare long term (perhaps forever).

2. Belem Company stock currently sells at $21 per share. Giventhe uncertainty in the economy, you have estimated that after oneyear, the stock price and its dividend will have the followingprobabilty distribution.

Probability_______________Price/Share_______________Dividend/Share

10%______________________$26______________________$1.20

40%______________________$24______________________$1.10

40%______________________$22______________________$1.00

10%______________________$15______________________$0.90

The expected return of the market is 13% and the risk-free rateis 5%. Estimate the Beta of the stock.

3. Goiania Company has the same growth rate as CampinasCorporation. The current stock price of Goiania is $43 per share,and its dividend this year is $3. The riskless rate is 4% and theexpected return on the market is 12%. Campinas stock is selling at$75 per share. Its dividend next year will be $4 a share and itsBeta is 1.3. Find the Beta of the Goiania stock.

Answer rating: 100% (QA)

1 Expected return on market 1541030 9 Expected retun on stock 513995 1056 Stock pr... View the full answer