Problem 11-05

Jersey Jewel Mining has a beta coefficient of 1. Currently the risk-free rate is 1 percent and the anticipated return on the market is 7 percent. JJM pays a $4.80 dividend that is growing at 4 percent annually. Do not round intermediate calculations.

A. What is the required return for JJM? Round your answer to two decimal places. ______ %

B. Given the required return, what is the value of the stock? Round your answer to the nearest cent. $_______

C.If the stock is selling for $181, what should you do?

The stock (is or is not) overvalued and (Should or Should not) be purchased. (Please select one of the following)

D. If the beta coefficient declines to 0.8, what is the new value of the stock? Round your answer to the nearest cent. $ _________

E.If the price remains $181, what course of action should you take given the valuation in D ?

The stock is (overvalued or undervalued) and ( should or should no) be purchased.