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?
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.)
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?
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?
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?
6. A stock just paid a dividend of $1. The required rate of return is rs = 11%, and the constant growth rate is 5%. What is the current stock price?
7. The Lashgari Company is expected to pay a dividend of $1 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.2, the market risk premium is 5%, and the risk-free rate is 3%. What is the company's current stock price?
8. An increase in a firm's expected growth rate would normally cause its required rate of return to
Possibly increase, decrease, or have no effect.
9. If a company's dividend is $2.12 and the price of the company's stock is $40 what is the stock's dividend yield?
10. A share of common stock has just paid a dividend of $2.00. If the expected long-run growth rate for this stock is 7%, and if investors require a(n) 11% rate of return, what is the price of the stock?
Formula - Required rate of return = risk free rate + Beta*market risk premium
Formula - Market risk premium = required market return - risk free rate
Formula - Stock price = Expected divdend/(required return- constant growth rate)
1. Magee's Required return = 4.5% + 1.2*5% = 4.5%+6 = ...
The solution computes required return, portfolio beta, current stock price, and dividend yield in order to solve the problems, providing the answer as well as how it was obtained.