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You have $20,000. After the success of the sequel of the Hunger Games, you want to know if Lions Gate Entertainment Corp. (NYSE:LGE) is a
- You have $20,000. After the success of the sequel of the Hunger Games, you want to know if Lions Gate Entertainment Corp. (NYSE:LGE) is a good buy. The firms total risk is 19%, its systematic risk is 0.57, the t-bill rate is 2.0%, the 30 year treasury rate is 3.5%, and the average market return is 8.8%.
- What is the expected return on Lions Gate Entertainment Corp?
- Assume you constructed a DCF model to evaluate Lions Gate Entertainment Corp and you found that the current market price of the stock implies an expected return of 8.05% [Note: You do not actually have to do a DCF model for this problem]. Given you answer in part (a), is the firm overvalued, undervalued, or properly priced? Explain.
- What is the expected return on Lions Gate Entertainment Corp?
- Assume you constructed a DCF model to evaluate Lions Gate Entertainment Corp and you found that the current market price of the stock implies an expected return of 8.05% [Note: You do not actually have to do a DCF model for this problem]. Given you answer in part (a), is the firm overvalued, undervalued, or properly priced? Explain.
- You are considering an investment in firm ABC. You know the risk free rate is 3.5%, the expected return on the market portfolio is 8.8%, and the standard deviation of the market portfolio is 15.35%. You also know that stock ABC has a standard deviation of 45.3% but it is uncorrelated with the market portfolio.
- What is the beta of stock ABC?
- According to the CAPM, what is the expected return on stock ABC?
- You know that firm ABC has a higher standard deviation than the market portfolio. How do you explain the return in part (b) and the fact that is has a high standard deviation? In particular, what do you know about the risk?
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