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Rate of Return / Value of Investment

I don't know where to start with each calculation with the information given for each investment. If I know where to put the numbers, I can figure it out, with step by step directions. I need these done correctly so I can work the rest of the problems: which is weighted average expected rate, expected standard deviation, and correlation of investments.

Sam and Sally Vallarta have a portfolio consisting of the following investments:
1. $20,000 of Speightstown Corp. common stock, consisting of 800 shares with a current market price of $25 per share. The Beta of Speightstown Corp. stock is 1.20, and the stock pays no dividends.
2. $15,000 of Lucca Corp. common stock, consisting of 150 shares with a current market price of $100 per share. The beta of Lucca stock is .60 and it paid annual dividends of $5.75 per share during the past year. Dividends are expected to grow at a rate of 4% per year.
3. 30 Frederickstad Corp. bonds (face value of $1,000 each) maturing in 2020. These bonds have a coupon of 5.2% and pay interest annually. They are rated AA by Standard and Poors.
Assume that these are all owned in joint tenancy, and not held in IRAs or other tax-deferred vehicles (like 401k's).
Instructions:
1. Using the Capital Asset Pricing Model (CAPM), determine the expected rate of return next year for investment #1. Assume a market premium of 7%.
2. Using the dividend growth model, determine the value of investment #2 if the Vallartas' required rate of return for this investment is 4.5%.
3. Determine the value of investment #3 if the Vallartas' required return for this investment is 5%.

Solution Preview

Sam and Sally Vallarta have a portfolio consisting of the following investments:
1. $20,000 of Speightstown Corp. common stock, consisting of 800 shares with a current market price of $25 per share. The Beta of Speightstown Corp. stock is 1.20, and the stock pays no dividends.
2. $15,000 of Lucca Corp. common stock, consisting of 150 shares with a current market price of $100 per share. The beta of Lucca stock is .60 and it paid annual dividends of $5.75 per share during the past year. Dividends are expected to grow at a rate of 4% per year.
3. 30 Frederickstad Corp. bonds ...

Solution Summary

The solution explains how to calculate the rate of return using CAPM and dividend discount model and use that to find the value of investment

$2.19