Purchase Solution

# Stock Price/ Portfolio beta / Investment

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1.- Malenke's Incorporated paid a dividend (Do) of \$2.00 this morning. Malenke's stockholders require a 20 percent of return. Calculate Malenke's stock price under the following scenarios: Malenke's earnings and dividends remain constant forever. Malenke's earnings and dividends grow at a rate of 10 percent forever. Malenke's earnings and dividends grow at a rate of -10 percent forever.

2.- Your hold four stocks in your portfolio, Stock A, Stock B, Stock C, and Stock D. The portfolio B is 1.2. Stock C constitutes 40 percent of the dollar value of your holdings and has a B of 1.60. If you sell all of your holdings in stock C, and replace them with an equal investment in stock E (which has a B of 1.25), what will your new portfolio B be?

3.- San Marco Incorporated has B of 1.75. MacMullan Corporation has a B of 2.75. the risk-free rate is 4 percent and the market risk premium is 8 percent. If I want to invest in both San Marco and MacMullan, and I want my investment to have a required rate of return of 20 percent, what proportions of my investment should be in each firm?

I need help with this problems. I have tried myself to do it but I just can't get it. Please show me step by step so I can understand it.

##### Solution Summary

The solution explains three questions relating to stock price, beta of a portfolio and proportion of investment to be made in different assets

##### Solution Preview

1.- Malenke's Incorporated paid a dividend (Do) of \$2.00 this morning. Malenke's stockholders require a 20 percent of return. Calculate Malenke's stock price udner the following scenarios: Malenke's earnings and dividends remain constant forever. Malenke's earnings and dividens grow at a rate of 10 percent forever. Malenke'searnins and dividends grow at a rate of -10 percent forever.

For all these questions we calculate the Stock price using the dividend discount model
Stock Price = D1/(Required return - growth rate)'
Where D1 = expected dividend = D1 X (1+growth rate)
Required return = 20%
Malenke's earnings and dividends remain constant forever - In this case the growth rate is zero since the dividends remain constant
D1 will be the same as D0 = \$2.00
g = 0%
Stock Price = 2/20% = \$10

Malenke's earnings and ...

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