The beta coefficient for Stock C is bC = 0.4, whereas that for Stock D is bD
Question:
The beta coefficient for Stock C is bC = 0.4, whereas that for Stock D is bD = _0.5. (Stock D’s beta is negative, indicating that its rate of return rises whenever returns on most other stocks fall. There are very few negative beta stocks, although collection agency stocks are sometimes cited as an example.)
a. If the risk-free rate is 9 percent and the expected rate of return on an average stock is 13 percent, what are the required rates of return on Stocks C and D?
b. For Stock C, suppose the current price, P0, is $25; the next expected dividend, D1, is $1.50; and the stock’s expected constant growth rate is 4 percent. Is the stock in equilibrium? Explain, and describe what will happen if the stock is not in equilibrium.
StocksStocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Beta Coefficient
Beta coefficient is a measure of sensitivity of a company's stock price to movement in the broad market index. It is an indicator of a stock's systematic risk which is the undiversifiable risk inherent in the whole financial system. Beta coefficient...
Step by Step Answer:
a r i r RF r M r RF b i r C 9 13 904 106 r D 9 13 905 7 Note that r D is below the riskfree rat...View the full answer
Financial management theory and practice
ISBN: 978-0324422696
12th Edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
