Question 4 The table below displays some valuation characteristics for four stocks. Answer the items below...

 

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Question 4 The table below displays some valuation characteristics for four stocks. Answer the items below by assuming the CAPM holds, and the risk-free interest rate for borrowing and lending is 5%. Stock A B C D Share Price (Po) $24.50 $100 $72 $44 Expected Return 12.7% 9.2% 19% Dividend Yield (D/Po) 5.2% 15% 1.1% Plowback ratio 50% 40% 20% 60% Earnings growth ROE rate 7.5% 5% 4% 12.5% 20% CAPM beta 0.6 2.0 0.3 (a) "If a portfolio has a CAPM beta of 1.0, then its realised return must be the same as that of the market portfolio". True/false? Explain. (You will be marked on the explanation(s) provided). (4 marks) (b) What is the ROE for Stock A? Explain any assumptions you need to make. (4 marks) (c) Determine the dividend yield for Stock B. Explain any assumptions you need to make. (4 marks) (d) What is the Present Value of Growth Opportunities (PVGO) implied by the price of Stock C? Explain in detail your calculations. (5 marks) (e) What is the earnings growth rate for Stock D? Explain in detail your calculations. (6 marks) (1) Now suppose that the risk-free interest rate for borrowing is greater than 5% (lenders still receive 5%). For simplicity, assume the optimal risky portfolio is unchanged. How would the share prices of the four stocks be affected? Explain fully (10 marks) Question 4 The table below displays some valuation characteristics for four stocks. Answer the items below by assuming the CAPM holds, and the risk-free interest rate for borrowing and lending is 5%. Stock A B C D Share Price (Po) $24.50 $100 $72 $44 Expected Return 12.7% 9.2% 19% Dividend Yield (D/Po) 5.2% 15% 1.1% Plowback ratio 50% 40% 20% 60% Earnings growth ROE rate 7.5% 5% 4% 12.5% 20% CAPM beta 0.6 2.0 0.3 (a) "If a portfolio has a CAPM beta of 1.0, then its realised return must be the same as that of the market portfolio". True/false? Explain. (You will be marked on the explanation(s) provided). (4 marks) (b) What is the ROE for Stock A? Explain any assumptions you need to make. (4 marks) (c) Determine the dividend yield for Stock B. Explain any assumptions you need to make. (4 marks) (d) What is the Present Value of Growth Opportunities (PVGO) implied by the price of Stock C? Explain in detail your calculations. (5 marks) (e) What is the earnings growth rate for Stock D? Explain in detail your calculations. (6 marks) (1) Now suppose that the risk-free interest rate for borrowing is greater than 5% (lenders still receive 5%). For simplicity, assume the optimal risky portfolio is unchanged. How would the share prices of the four stocks be affected? Explain fully (10 marks)

Answer rating: 100% (QA)

a False The statement is not true The CAPM Capital Asset Pricing Model relates the expected return of an asset to its systematic risk as measured by its beta The beta measures the sensitivity of an as... View the full answer