| What was the annual growth rate? (Round your answer to 2 decimal places.) 8. | If the risk-free rate is 6 percent and the risk premium is 5 percent, what is the required return? |
9. Suppose that a firms recent earnings per share and dividend per share are $2.50 and $1.30, respectively. Both are expected to grow at 8 percent. However, the firms current P/E ratio of 22 seems high for this growth rate. The P/E ratio is expected to fall to 18 within five years. | Compute the dividends over the next five years. (Do not round intermediate calculations and round your finalanswers to 3 decimal places.) |
Compute the value of this stock in five years. (Do not round intermediate calculations and round your finalanswer to 2 decimal places.) Calculate the present value of these cash flows using a 10 percent discount rate. (Do not round intermediate calculations and round your final answer to 2 decimal places.) 10. A firm does not pay a dividend. It is expected to pay its first dividend of $0.20 per share in three years. This dividend will grow at 11 percent indefinitely. Use a 12 percent discount rate. | Compute the value of this stock today which is time 0. (Round your answer to 2 decimal places.) |
11. | Economic State | | Probability | | Return | | Fast growth | | 0.2 | | 40 | % | | Slow growth | | 0.4 | | 10 | | | Recession | | 0.4 | | 25 | | Determine the standard deviation of the expected return. (Round your answer to 2 decimal places.) |
12. | Economic State | | Probability | | Return | | Fast growth | | 0.30 | | 60 | % | | Slow growth | | 0.50 | | 13 | | | Recession | | 0.15 | | 15 | | | Depression | | 0.05 | | 45 | | | Compute the expected return and standard deviation |
13. Hastings Entertainment has a beta of 0.24. If the market return is expected to be 11 percent and the risk-free rate is 4 percent, what is Hastings required return? (Round your answer to 2 decimal places.) 14. A preferred stock from Duquesne Light Company (DQUPRA) pays $2.10 in annual dividends. | If the required return on the preferred stock is 5.4 percent, whats the value of the stock? (Round your answer to 2 decimal places.) |
15. A firm is expected to pay a dividend of $1.35 next year and $1.50 the following year. Financial analysts believe the stock will be at their price target of $75 in two years. | Compute the value of this stock with a required return of 11.5 percent. (Do not round intermediate calculations and round your final answer to 2 decimal places.) |
16. The NASDAQ stock market bubble peaked at 4,816 in 2000. Two and a half years later it had fallen to 1,000. What was the percentage decline? (Negative answer should be indicated with a minus sign. Round your answer to 2 decimal places.) 17. Ecolap Inc. (ECL) recently paid a $0.46 dividend. The dividend is expected to grow at a 14.5 percent rate. The current stock price is $44.12. | What is the return shareholders are expecting? (Do not round intermediate calculations and round your final answer to 2 decimal places.) |
18. Ultra Petroleum (UPL) has earnings per share of $1.56 and a P/E ratio of 32.48. | Whats the stock price? (Round your answer to 2 decimal places.) |
19. A manager believes his firm will earn a 14 percent return next year. His firm has a beta of 1.5, the expected return on the market is 12 percent, and the risk-free rate is 4 percent. | Compute the return the firm should earn given its level of risk |
20. Paccars current stock price is $73.10 and it is likely to pay a $2.69 dividend next year. Since analysts estimate Paccar will have an 11.2 percent growth rate, what is its required return? (Round your answer to 2 decimal places.) 21. | Price | | Upcoming Dividend | | Growth | | Beta | | | US Bancorp | $ | 36.55 | | | | $ | 1.60 | | | | 10.0 | % | | 1.8 | | | Praxair | | 64.75 | | | | | 1.12 | | | | 11.0 | | | 2.4 | | | Eastman Kodak | | 24.95 | | | | | 1.00 | | | | 4.5 | | | 0.5 | | | Assume that the market portfolio will earn 12 percent and the risk-free rate is 3.5 percent. |
| Compute the required return for each company using both CAPM and the constant-growth model. (Do not round intermediate calculations and round your final answers to 2 decimal places.) |
22. You own $10,000 of Dennys Corp stock that has a beta of 2.9. You also own $15,000 of Qwest Communications (beta = 1.5) and $5,000 of Southwest Airlines (beta = 0.7). Assume that the market return will be 11.5 percent and the risk-free rate is 4.5 percent. | What is the market risk premium |
What is the risk premium of each stock? (Round your answers to 2 decimal places What is the risk premium of the portfolio? (Do not round intermediate calculations and round your finalanswer to 2 decimal places.) 23. You own $10,000 of Olympic Steel stock that has a beta of 2.7. You also own $7,000 of Rent-a-Center (beta = 1.5) and $8,000 of Lincoln Educational (beta = 0.5). | What is the beta of your portfolio? (Round your answer to 2 decimal places.) 24. Walgreen Co. (WAG) paid a $0.137 dividend per share in 2000, which grew to $0.286 in 2006. This growth is expected to continue. | What is the value of this stock at the beginning of 2007 when the required return is 13.7 percent? (Round the growth rate, g, to 4 decimal places. Round your final answer to 2 decimal places |
25. | Economic State | | Probability | | Return | | Fast growth | | 0.2 | | 40 | % | | Slow growth | | 0.4 | | 10 | | | Recession | | 0.4 | | 25 | | | What is the expected return? | |
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