Purchase Solution

stock sensitive to changes in risk premiums & growth expectations

Not what you're looking for?

Ask Custom Question

Here is information on Stock A and B:

Stock A Stock B
Expected Dividends Next Year $1.00 $2.33
Expected Constant ROE 20% 20%
Expected Retention Rate 70% 30%
Required Return on Stocks of = risk 20% 20%

Which stock is more sensitive to changes in risk premiums and growth expectations?
Also, would you consider either a true growth stock?

Purchase this Solution
Solution Summary

The expert examines stock sensitive to changes in risk premiums and growth expectations. A situational stock is analyzed.

Solution Preview

Stock A: g=ROE*Retention Rate = 0.2*0.7=0.14
Then Po = D1 / (k-g) = 1/(0.2-0.14) = $ 16.67

Stock B: g=ROE*Retention Rate = 0.2*0.3=0.06
Then Po = D1 / (k-g) = 2.33/(0.2-0.06) = $ 16.64

Their price are almost the same, however, we notice the major difference between the two stocks are their dividends and growth rate (which results from different retention rate)

The denominator of stock ...

Purchase this Solution
Free BrainMass Quizzes
Understanding the Accounting Equation

These 10 questions help a new student of accounting to understand the basic premise of accounting and how it is applied to the business world.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Understanding Management

This quiz will help you understand the dimensions of employee diversity as well as how to manage a culturally diverse workforce.

IPOs

This Quiz is compiled of questions that pertain to IPOs (Initial Public Offerings)

MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

View More Free Quizzes
Related BrainMass Solutions

  • Multiple Choice

    none of the above Question 23 The value of long-term bonds is __________ sensitive to changes in __________ than short-term bonds. a. more; interest rates b. more; GDP growth c.

  • Finance Questions

    However, this long time to maturity also makes preferred shares highly sensitive to changes in interest rates. Bonds, which are of shorter duration, are thus less affected by change in yield as compared to preferred stocks. 8.

  • Understanding Theoretical Stock Prices

    From that we can see that the PE ratio model is based on future expectations while the Constant Growth Model is based upon past performance, such a difference between the two models is sure to result in a difference in the calculated price per share.

  • 4735-finance

    Plug in the discount rates10% and 20% and see the current price. Now consider the same bond with no coupons, use the same discount rates. You will notice that the change in price for a zero coupon bond is larger for changes in the discount rate.

  • Analysis CAPM model, Beta and Expected Return on Shares

    The standard deviation of the probability distribution of rates of return for the company's stock increases d. Market expectations of the growth of future earnings (and dividends) of the company are revised downwards.

  • Risk aversion and stocks' prices and earned rates of return

    The solution examines the effect of changes in risk aversion on stocks' prices and earned rates of returns.

  • Trend Analysis for Investing in Stocks

    The biggest risk that global companies face is the exchange rate risk due to trade in different currencies and the political risk due to operating in different countries. 4.

  • Interest Rates, YTM, Options, Stocks, Bonds

    In what respect is a perpetual bond similar to a no-growth common stock, and to a share of preferred stock?

  • Multiple choice questions in financial management

    d. none of the above 5) Because bond prices are sensitive to changes in interest rates: a. it stands to reason that bonds hardly ever sell in the secondary market at their face value.

View More Related Solutions