# 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