Fin Investment Class help
Geoge
BKM_Ess_10e_Ch07_Student1.xlsx7-10
| The market price of a security is $40. Its expected rate of return is 13%. The risk-free rate is 7%, and the market risk premium is 8%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity. | |
| Market price of security | |
| Security expected rate of return | |
| Risk free rate of return | |
| Market risk premium | |
| Change in beta (x) | |
| Solution | |
| Current security beta | ERROR:#DIV/0! |
| New security beta | ERROR:#DIV/0! |
| Current dividend | $ - 0 |
| New expected rate of return on security | ERROR:#DIV/0! |
| New price of security | ERROR:#DIV/0! |
7-21
| Assume the risk-free rate is 8% and the expected rate of return on the market is 18%. A share of stock is now selling for $100. It will pay a dividend of $9 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year? | |
| T-bill rate | |
| Mareket return | |
| Current share price | |
| Year end dividend | |
| Beta | |
| Solution | |
| Expected return | 0.0% |
| Estimate stock price | $ - 0 |
7-25
| Suppose the yield on short-term government securities (perceived to be risk-free) is about 4%. Suppose also that the expected return required by the market for a portfolio with a beta of 1 is 12%. According to the capital asset pricing model: a. What is the expected return on the market portfolio? b. What would be the expected return on a zero-beta stock? c. Suppose you consider buying a share of stock at a price of $40. The stock is expected to pay a dividend of $3 next year and to sell then for $41. The stock risk has been evaluated at beta = -0.5. Is the stock overpriced or underpriced? | ||
| Investment | Return | Beta |
| ST govt | ||
| Market | ||
| Start stock price | ||
| End stock price | ||
| Dividend | ||
| Stock beta | ||
| Solution | ||
| a. | Expected market return = | 0.0% |
| b. | Expected return on zero beta stock = | 0.0% |
| c. | ||
| SML expected return = | 0.00% | |
| Expected return = | ERROR:#DIV/0! |
