Problem 11-05

Jersey Jewel Mining has a beta coefficient of 1.3.

Currently the risk-free rate is 2 percent and the anticipated return on the market is 7 percent.

JJM pays a $4.20 dividend that is growing at 6 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 $195, what should you do?

The stock -Select-(is or is not)? .... overvalued and -Select-(should/should notI)? ...... be purchased.

d. If the beta coefficient declines to 1.2, what is the new value of the stock? Round your answer to the nearest cent.

$

e. If the price remains $195, what course of action should you take given the valuation in d?

The stock is -Select-(overvalued or undervalued)?.... and -Select-(should/should not)?... be purchased.