Stock pricing with constant dividend or dividend with constant growth rate.

What is the current per-share value of JRM Corporation to an investor who require a 16% rate of return?

JRM current per-share dividend is $2 and is expected to remain at 2 for the foreseeable future?

D0 = ??; r = ??; Price = ??

What is the price if the per-share dividend will grow at 2%?

D0 = ??; g = ??; r = ??; Price = ??

Stock pricing with uneven dividend growth rate

The Seneca Maintenance Company currently (that is, as of year 0) pays a common stock dividend of $1.5 per share. Dividend are expected to grow at a rate of 11% per year for the next 4 years and then continue growing thereafter at a rate of 5% per year. What is the current value of a share of Seneca common stock to an investor who require a 14% rate of return?

Hint:

Calculate the cash flow of the stock for year 1-4, and the terminal value at the end of year 4.

What is the cash flow for year 1-4, including both dividend and terminal value?

The stock price is calculated as the sum of the present value of the cash flows from year 1-4.

year	dividend growth rate	dividend	terminal value	Total cash flow = dividend + terminal value	sum of discounted future cash flow
0					??
1	11%	??		??
2	11%	??		??
3	11%	??		??
4	11%	??	??	??
5	5%	??

Calculate the expected return and standard deviation of for single stocks and portfolio

You have estimated the following probability distributions of expected future returns from stocks X and Y:

What is the expected return for stock X and Y?

Expected return of X = ??

Expected return of Y = ??

What is the standard deviation of expected returns for stock X and Y?

Standard deviation of X = ??

Standard deviation of Y = ??

Calculate the expected return and standard deviation of the mix of 50% X and 50% Y.

Expected return of the mix of 50% X + 50% Y = ??

Which stock would you consider to be riskier, X, Y, or 50% X + 50% Y? Why? (hint: calculate the coefficient of variation (COV) = standard deviation / expected return and compare.) Hints: please study the slides for the explanation of calculations.

Cov of X = ??

Cov of Y = ??

Cov of ( 50% X + 50% Y) = ??

Which do you pick? ---- ??

Capital asset pricing model (CAPM)

Give a risk-free rate (rf) of 6% and a market risk premium (rm rf) of 8.2%, calculate the required rate of return on each the following case. Hint: CAPM model: r = rf + * (rm rf)

Amazon.com with = 1.05

??

DuPont with = 1.15

??

30% Amazon + 70% of DuPont.

??

Cost of capital

Wright Express (WE) has a capital structure of30% debt and 70% equity. WE is considering a project that requires an investment of$2.6 million. To finance this project, WE plans to issue 10-year bonds with a coupon interest rate of 12%. Each of these bonds has a $1,000 face value and will be sold to net WE $980. If the current risk-free rate is 7% and the expected market return is 14.5%, what is the weighted cost of capital for WE? Assume WE has a beta of 1.20 and a marginal tax rate of 40%.

	debt			equity
allocation	??			??
maturity	??		risk free rate	??
coupon rate	??		market return	??
par	??		beta	??
price	??
tax rate	??
nper	??		rf	??
pmt	??		rm	??
pv	??		rm - rf	??
fv	??		beta	??
type	??
bond yield			from capm
rate	??		rf + beta * (rm - rf)	??
tax rate
cost of debt	??		cost of equity	??
cost of capital	??