Question
Please tell me if these are calculated correctly. If they are not please show step by step how to solve Thank you : ) (1)Your
Please tell me if these are calculated correctly. If they are not please show step by step how to solve Thank you : )
(1)Your company's stock sells for $150 per share, its last dividend was $3.00 per share, and its growth rate is 4%. What is the stock's required rate of return?
150 =D(1+g)/(r-g)
150=3.00 (1.04)/(r-.04)
150r-4=3.12
150r= 7.12 /150
r= .0474 or 4.7%
(2)What is the stock's Beta if the average market return for the stock is 12%, and the interest yield on 10-year US Treasury Bonds is 4% and the required or expected rate of return is 20%?
E(Rp) = Rf+B[E(Rm)-Rf)
0.20 = .04+B(0.12-.04)
B=2
(3)The expected return for investment A is 10%, with a standard deviation of 1.2%. The expected return for investment B is 25%, with a standard deviation of 3%. Is B riskier than A? Answer "yes" or "no" AND then show your work and explain your answer.
Answer should be No. The risk/return ratio using coefficient of variation[standard deviation/expected return] is the same for A and B.
CV for A = 1.2/10= .12 CV for B= 3/25= .12
we present historical rates of return for alternative asset classes, presenting the standard deviation as a measure of risk (uncertainty) for the series or asset class is fairly common.
(4)A company's 12-month trailing earnings per share [EPS] are $4.50, and is expected to grow 10% annually. If an investor is willing to pay a P/E multiple that is no higher than 2.5 times its growth rate, and the stock is currently selling at $100 per share, would this be an acceptable purchase price? Explain and support your answer with numbers.
P/E ratio=price/EPS 2.5x4.5x10%= 112.5 Yes this is an acceptable purchase price it is less than what he is willing to pay.
(5)Given the following information, calculate the companys internal growth rate. Return on Equity = 21%; 12.5 Dividend Payout Ratio = 15%. 20
IGR = ROE * (1-Div payout ratio) IGR = 0.21*(1-0.15) IGR = 17.85%
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