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(b) Suppose all possible investment opportunities in the world are limited to the five stocks listed in the table below. Stock Price per share 10
(b) Suppose all possible investment opportunities in the world are limited to the five stocks listed in the table below. Stock Price per share 10 # of Shares Outstanding (millions) 10 12 A 21 Dividend yield 2% 5% 1% 4% 3% Expected capital gain 3% 0.5% 3% 2% 1% 3 w 41 48 20 (ii) What is the expected return of the market? (iii) (iv) If the risk-free rate is 2.5%, what is the risk premium of the market? You want to use the dividend discount model to get another estimate of the market risk premium. Based on some additional analysis you determine that the overall market dividend yield (D1/PO) is 2.5% and that the expected dividend growth rate of the market is 5.5%. The long-run risk-free rate is 2.5%. Assuming constant dividend growth, what is the implied market risk premium? Name one reason why it might be different from your answer in (iii)
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