Problem 11-05

Jersey Jewel Mining has a beta coefficient of 1.6. Currently the risk-free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $3.80 dividend that is growing at 6 percent annually. Do not round intermediate calculations.

1. What is the required return for JJM? Round your answer to two decimal places. ...............%
2. Given the required return, what is the value of the stock? Round your answer to the nearest cent. $...................
3. If the stock is selling for $100, what should you do? The stock (is / is not) overvalued and (should / should not) be purchased.
4. If the beta coefficient declines to 1.3, what is the new value of the stock? Round your answer to the nearest cent. $......................
5. If the price remains $100, what course of action should you take given the valuation in d? The stock is (overvalued / not overvalued) and (should / should not) be purchased.

Thank you!