The risk-free rate of return is 2 percent, and the expected return on the market is...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
The risk-free rate of return is 2 percent, and the expected return on the market is 8.7 percent. Stock A has a beta coefficient of 1.6, an earnings and dividend growth rate of 7 percent, and a current dividend of $2.80 a share. Do not round intermediate calculations. Round your answers to the nearest cent. a. What should be the market price of the stock? b. If the current market price of the stock is $36.00, what should you do? The stock -Select- v be purchased. c. If the expected return on the market rises to 11.3 percent and the other variables remain constant, what will be the value of the stock? d. If the risk-free return rises to 4.5 percent and the return on the market rises to 11.8 percent, what will be the value of the stock? e. If the beta coefficient falls to 1.5 and the other variables remain constant, what will be the value of the stock? 2$ f. Explain why the stock's value changes in c through e. The increase in the return on the market -Select- v the required return and -Select- v the value of the stock. The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to -Select- v. The decrease in the beta coefficient causes the firm to become -Select- v risky as measured by beta, which -Select- v the value of the stock. The risk-free rate of return is 2 percent, and the expected return on the market is 8.7 percent. Stock A has a beta coefficient of 1.6, an earnings and dividend growth rate of 7 percent, and a current dividend of $2.80 a share. Do not round intermediate calculations. Round your answers to the nearest cent. a. What should be the market price of the stock? b. If the current market price of the stock is $36.00, what should you do? The stock -Select- v be purchased. c. If the expected return on the market rises to 11.3 percent and the other variables remain constant, what will be the value of the stock? d. If the risk-free return rises to 4.5 percent and the return on the market rises to 11.8 percent, what will be the value of the stock? e. If the beta coefficient falls to 1.5 and the other variables remain constant, what will be the value of the stock? 2$ f. Explain why the stock's value changes in c through e. The increase in the return on the market -Select- v the required return and -Select- v the value of the stock. The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to -Select- v. The decrease in the beta coefficient causes the firm to become -Select- v risky as measured by beta, which -Select- v the value of the stock.
Expert Answer:
Answer rating: 100% (QA)
ans a market price of stock next year dividendequity return growth rate equity ret... View the full answer
Related Book For
Personal Finance Turning Money into Wealth
ISBN: 978-0133856439
7th edition
Authors: Arthur J. Keown
Posted Date:
Students also viewed these accounting questions
-
Suppose the risk free rate of return is 6%, maturity risk premium is 2%, inflation premium is 4%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominal interest...
-
A particular securitys equilibrium rate of return is 8 percent. For all securities, the inflation risk premium is 1.75 percent and the real risk-free rate is 3.5 percent. The securitys liquidity risk...
-
An investors required rate of return is important when valuing a bond. What two factors can cause an investors required rate of return to change?
-
Certain companies regard the management of cultural diversity as a way of developing new competencies that give them certain advantages. They are, for example, able to recruit and hold on to good...
-
Suppose that the representative consumer's preferences change, in that his or her marginal rate of substitution of leisure for consumption increases for any quantities of consumption and leisure. (a)...
-
Gabriela Manufacturing must decide whether to insource (make) or outsource (buy) a new toxic-free carpet cleaner that works with its Miracle Carpet Cleaning Machine. If it decides to insource the...
-
What is the formula for calculating the factory overhead applied rate?
-
1. What does the case suggest is the value of ethical behavior? What did Siemens gain by introducing controls to minimize the likelihood of corruption? 2. Most countries lack adequate laws or...
-
Write a business plan for a healthcare/medical start-up idea which would operate in/from the UAE What does the company do? What is your strategic vision? How is it going to work at an operational...
-
Find R ab in the four-way power divider circuit in Fig. 2.135 . Assume each R = 4 . ww- ww- ER ER R. :R
-
The Company has two types of services: audit and tax. Company's overhead costs consist of computer support ($240,000) and legal support ($120,000). The following information is provided on the two...
-
How does corporate strategy drive project selection and project strategy?
-
Define cost estimation and discuss its importance in project planning.
-
Describe the essential features of effective value management in projects.
-
Identify the key elements of effective project cost management.
-
Describe the importance of cost and value management in projects.
-
Mitsu Corporation produces two types of flat-screen televisions. The standard televisions are designed for durability. The company recently began producing the higher-quality, high-grade model to...
-
Highland Theatre is owned by Finnean Ferguson. At June 30, 2014, the ledger showed the following: Cash, $6,000; Land, $100,000; Buildings, $80,000; Equipment, $25,000; Accounts Payable, $5,000;...
-
Ted and Tiffany are meeting Mitch and Amber at the Green Turtle Club later in the evening. Wanting to set some limits on what could be an expensive evening, Ted stops at the ATM and uses his credit...
-
1. Assuming that the stock actually splits two for one, how many shares will Pete and Jessica own? What will be the market value of their stock after the split? How will the split affect the value of...
-
Explain the new health insurance exchange system as outlined in the Affordable Care Act. How does this benefit self-employed individuals?
-
The Internet is a good place to get information that is useful to you in your study of accounting. For example, you can find information about current events, professional accounting organizations,...
-
Which of the following does not describe accounting? a. Language of business. b. Is an end rather than a means to an end. c. Useful for decision making. d. Used by business, government, nonprofit...
-
Why does internal accounting information need to be timely?
Study smarter with the SolutionInn App