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# Rate of Return / Value of Investment

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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