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The risk-free rate of return, RF, is 5%. *The required rate of return on the market, rm, is 12%. *The Upton Company's stock has a
The risk-free rate of return, RF, is 5%. *The required rate of return on the market, rm, is 12%. *The Upton Company's stock has a beta co-efficient of 1.2. HINT: For each of the problems listed below: First use the Security Market Line (SML) equation (top of page 353 in the text) to solve for the required rate of return, rs, on Upton Company's stock. Then, use the Gordon constant growth model (at the center of page 303) to solve for the expected stock price, P0. 1. If the dividend expected during the coming year, D1, is $2.00, and if g equals a constant 4%, at what price should Upton's stock sell? a. SML variables: RF= %;rm= %;b= Solve the SML equation to find rs. b. Gordon Model variables: D1=$ ;g=%;rs= % ** Note that rs is the solution to the SML equation just solved. Solve the Gordon Model equation to find Po
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