STOCK VALUATION Robert Balik and Carol Kiefer are senior vice presidents of the Mutual of Chicago Insurance Company. They are codirectors of the companys pension fund management division, with Balik having responsibility for fixed-income securities (primarily bonds) and Kiefer being responsible for equity investments. A major new client, the California League of Cities, has requested that Mutual of Chicago present an investment seminar to the mayors of the represented cities; and Balik and Kiefer, who will make the actual presentation, have asked you to help them.

To illustrate the common stock valuation process, Balik and Kiefer have asked you to analyze the Bon Temps Company, an employment agency that supplies word-processor operators and computer programmers to businesses with temporarily heavy workloads. You are to answer the following questions:

1. Assume that Bon Temps has a beta coefficient of 1.2, that the risk-free rate (the yield on T-bonds) is 3%, and that the required rate of return on the market is 8%. What is Bon Tempss required rate of return?

2. Assume that Bon Temps is a constant growth company whose last dividend ( , which was paid yesterday) was $2.00 and whose dividend is expected to grow indefinitely at a 4% rate.

   1. What is the firms expected dividend stream over the next 3 years?

   2. What is its current stock price?

   3. What is the stocks expected value 1 year from now?

   4. What are the expected dividend yield, capital gains yield, and total return during the first year?

3. Now assume that the stock is currently selling at $40.00. What is its expected rate of return?