CBS bond with a par value of $1,000, an interest rate of 7.625 percent, and a maturity of 10 years The bond is selling for $986.

Alabama Power Company preferred stock with a $50 par value and a dividend of $2.8125 per 61 year. The stock is currently trading at $39 per share.

Emerson Electric common stock that is selling for $80 with a par value of $5. This stock recently paid a $2.50 dividend, and the firm's earnings per share have increased from $2.40 to $4.48 in the past 5 years. An equivalent amount of growth in the dividend is expected.

Your required rates of return for these investments are 6 percent for the bond, 7 percent for the preferred stock, and 15 percent for the common stock. Using this information, answer the following questions:

a. Calculate the value of each investment based on your required rate of return.
b. Which investment would you select? Why?
c. Assume Emerson Electrics managers expect an earnings downturn and a resulting decreases in growth of 3 percent. How does this affect your answers to parts 1 and 2?
d. What required rates of return would make you indifferent to all three options?

Solution Summary

Calculate the value of each investment based on your required rate of return.

Exaplain why you would change your nominal requiredrate of returne if you expected the rate of inflation to go from 0 (NO INFLATION) to 4 percent. Give an example if what would happen if you didn't change your requiredrate of return under these conditions.

42. If the expected rate of return on a stock exceeds the requiredrate
1. The stock is experiencing supernormal growth
2. The stock shoudl be sold
3. The company is probably not trying to maximize price per share
4. The stock is a good buy
5. Dividends are not being declared
(Pick the best answer)

A stock has a beta of 1.5, the market risk premium is 9%, and the risk-free rate is 5%.
a. What is the requiredrate of return on this stock?
b. What is the expected return on the market?
c. If based on your personal opinion the stock will generate a return of 20%, is the stock over-valued or under-valued? Would you buy or

XYZ company has a beta of -1.
The risk-free (nominal) rate is 3% per year and that the requiredrate of return on the market is 10% per year.
Find the requiredrate of return.

Russo's Gas Distributor, Inc. wants to determine the requiredreturn on a stock with beta coefficient of 0.5. Assuming a risk free rate of 6 percent and the market return of 12 percent, compute the requiredrate of return.

Consider the following information and then calculate the requiredrate of return for the Global Investment Fund, which holds 4 stocks. The market's requiredrate of return is 13.25%, the risk-free rate is 7.00%, and the Fund's assets are as follows:
Stock Investment Beta
A $200,000 1.50
B $300,000 -0.

See attached file.
8- 1 EXPECTED RETURN
A stock's returns have the following distribution:
Calculate the stock's expected return, standard deviation, and coefficient of variation.
8- 3 REQUIREDRATE OF RETURN
Assume that the risk- free rate is 6% and the expected return on the market is 13%. What is the required

Look at attached document.
8-1 EXPECTED RETURN A stock's returns have the following distribution:
Calculate the stock's expected return, standard deviation, and coefficient of variation.
8-3 REQUIREDRATE OF RETURN Assume that the risk-free rate is 6% and the expected return on the market is 13%. What is the requ

Consider the following information and then calculate the requiredrate of return for the Scientific Investment Fund, which holds 4 stocks. The market's requiredrate of return is 15.0%, the risk-free rate is 7.0%, and the Fund's assets are as follows:
Stock
Stock Investment Beta
A