Explore BrainMass

Explore BrainMass

    stock sensitive to changes in risk premiums & growth expectations

    Not what you're looking for? Search our solutions OR ask your own Custom question.

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    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?

    © BrainMass Inc. brainmass.com December 24, 2021, 4:55 pm ad1c9bdddf

    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 ...

    Solution Summary

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