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    Magee Company, Parr Paper

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    1. Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return?

    10.25%
    10.50%
    10.75%
    11.00%
    11.25%

    2. Parr Paper's stock has a beta of 1.40, and its required return is 13.00%. Clover Dairy's stock has a beta of 0.80. If the risk-free rate is 4.00%, what is the required rate of return on Clover's stock? (Hint: First find the market risk premium.)

    8.55%
    8.71%
    8.99%
    9.14%
    9.33%

    3. Suppose you hold a diversified portfolio consisting of $10,000 invested equally in each of 10 different common stocks. The portfolio's beta is 1.120. Now suppose you decided to sell one of your stocks that has a beta of 1.000 and to use the proceeds to buy a replacement stock with a beta of 1.750. What would the portfolio's new beta be?

    0.982
    1.017
    1.195
    1.246
    1.519

    4. A mutual fund manager has a $20.0 million portfolio with a beta of 1.50. The risk-free rate is 4.50%, and the market risk premium is 5.50%. The manager expects to receive an additional $5.0 million which she plans to invest in a number of stocks. After investing the additional funds, she wants the fund's required return to be 13.00%. What must the average beta of the new stocks added to the portfolio be to achieve the desired required rate of return?
    1.12
    1.26
    1.37
    1.59
    1.73

    5. A stock is expected to pay a dividend of $1 at the end of the year. The required rate of return is rs = 11%, and the expected constant growth rate is 5%. What is the current stock price?

    $16.67
    $18.83
    $20.00
    $21.67
    $23.33

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    Solution Preview

    1. Magee Company's stock has a beta of 1.20, the risk-free rate is 4.50%, and the market risk premium is 5.00%. What is Magee's required return?

    10.25%
    10.50%
    10.75%
    11.00%
    11.25%

    Answer: 10.50%

    4.50 + 1.2(5) = 10.50%

    2. Parr Paper's stock has a beta of 1.40, and its required return is 13.00%. Clover Dairy's stock has a beta of 0.80. If the risk-free rate is 4.00%, what is the required rate of return on Clover's stock? (Hint: First find the market risk premium.)

    8.55%
    ...

    Solution Summary

    This solution is comprised of a detailed explanation to answer what is Magee's required return.

    $2.19

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