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# GE stock, Hewlett Packard (HPQ), Georgia Pacific

1. GE stock has a beta of 1.2 and a standard deviation of 18% per year. The market portfolio has an expected return of 11% and a standard deviation of 15% per year. If the risk free rate of return is 3% what is the expected return on GE stock according to the CAPM.
2. Hewlett Packard (HPQ) has a constant rate of growth in dividends and earnings of 6% and a fixed dividend payout ratio of 40%. Last year, earnings were \$6.40 per share. HPQ's share price is \$70. What is the expected rate of return?
3. For the fiscal year just ended, Georgia Pacific announced earnings of \$5 per share and paid dividends of \$1.25. Next year, earnings per share are forecasted to be \$5.80 and dividends \$1.40 per share. Analysts expect that the current, trailing p/e ratio of 16 will expand to the historical average of 18 next year. If they are correct, what is the expected rate of return (1year)?

#### Solution Preview

1. GE stock has a beta of 1.2 and a standard deviation of 18% per year. The market portfolio has an expected return of 11% and a standard deviation of 15% per year. If the risk free rate of return is 3% what is the expected return on GE stock according to the CAPM.
Kj = Rf + B(Km - Rf)
Kj = 3% + 1.2(11% - 3%) = 12.6%

2. Hewlett Packard (HPQ) has a constant rate of growth in dividends and earnings of 6% ...

#### Solution Summary

This solution is comprised of a detailed explanation to calculate what is the expected return on GE stock, Hewlett Packard, and Georgia Pacific.

\$2.19