Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Rio Tinto Limited's ordinary shares last paid a dividend of 65 cents. Their dividend is expected to grow at 8% for 3 years and then

Rio Tinto Limited's ordinary shares last paid a dividend of 65 cents. Their dividend is expected to grow at 8% for 3 years and then grow at 5% from then onwards. The required return on their ordinary shares is 12%.

i)Draw the timeline of this scenario.(4 marks)

ii)What is the current value of a share?(6 marks)

Use the information in the table below for questions b) to e). The annual rate of return and related probabilities for each security are given.

Stock A

Stock B

Rate of Return

Probability

Rate of Return

Probability

10%

30%

5%

25%

14%

35%

15%

30%

18%

35%

25%

45%

b. Calculate the expected rate of return,E(R), for each stock.(2 marks)

c. Calculate the standard deviation,, for each stock.(4 marks)

d. Which stock should you purchase?Explain why you make such choice.(3 marks)

e. Imagine that you will make a portfolio that consists of 60% of Stock A and 40% of Stock B, assuming thecorrelation coefficientbetween A and B (A,B) is -0.35. Based on the answer you obtained fromb) and c),calculate the expected return,E(RP), and standard deviation,P, of your portfolio.(6 marks)

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

College Accounting A Practical Approach

Authors: Jeffrey Slater, Mike Deschamps

14th Edition

0134729315, 978-0134729312

More Books

Students also viewed these Accounting questions

Question

2. Find five metaphors for communication.

Answered: 1 week ago