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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

#### 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%

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