Purchase Solution

Market Interest Rate and Risk-Free Rate

Not what you're looking for?

Ask Custom Question

Star Solutions, Inc. paid a dividend last year of $3.55, which is expected to grow at a constant rate of 3%. Star Solutions has a beta of 1.8 and their stock is currently selling for $31.47. If the market interest rate is 9% and the risk-free rate is 4%, would you purchase Star Solutions' stock?
a. No, because it is overvalued $5.10 c. No, because it is overvalued $9.85
b. Yes, because it is undervalued $5.10 d. Yes, because it is undervalued $9.85

Purchase this Solution
Solution Summary

Market Interest Rate and Risk-Free Rate

Solution Preview

We use the discounted dividend model (DDM) and the CAPM to solve this problem.

Price = dividend/(required rate of return - growth ...

Purchase this Solution
Free BrainMass Quizzes
Marketing Management Philosophies Quiz

A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.

Transformational Leadership

This quiz covers the topic of transformational leadership. Specifically, this quiz covers the theories proposed by James MacGregor Burns and Bernard Bass. Students familiar with transformational leadership should easily be able to answer the questions detailed below.

Lean your Process

This quiz will help you understand the basic concepts of Lean.

Basic Social Media Concepts

The quiz will test your knowledge on basic social media concepts.

Organizational Leadership Quiz

This quiz prepares a person to do well when it comes to studying organizational leadership in their studies.

View More Free Quizzes
Related BrainMass Solutions

  • Interest Rate Parity

    231450 What is the Current Rate for Risk-Free Japanese Securities? The nominal rate of interest on six-month, risk-free U.S. securities is 6%. In the spot market, $1 U.S. = 104.84 Japanese yen.

  • required return

    The risk free interest rate today is 8% and the return on a market portfolio of stocks is 14%. (Therefore the market risk is 6%, the difference the market return and the risk free return). I.

  • CAPM Model - Calculating Expected & Risk Free Return

    B) Find the Risk-Free Rate given that the Expected Rate of Return on Asset "j" is 14%, the Expected Return on the Market Portfolio is 12%, and the Beta for Asset "j" is 1.5. Also, how do you figure out risk free rate?

  • Weighted Average Cost of Capital of Athena

    http://people.stern.nyu.edu/adamodar/pdfiles/eqnotes/discrate1.pdf What did you choose as Market premium and why? Market premium is the premium that investor expect to earn from the stock over the risk free securities.

  • Security and Capital Market Line

    = k* + IRP + DRP + MP + LP where k = nominal (quoted, observed) market interest rate k* = real (pure) interest rate: the real (default) risk-free, inflation-free rate of interest.

  • CAPM, Bonds

    The beta of the stock is 1.15 and the risk-free rate is 5%.  What is the market risk premium?

  • Risk premium on the market

    If the risk-free rate is 5 percent and the beta of KarolCo is 2.3, then what is the risk premium on the market assuming CAPM is true?

  • Calculate: Risk Free Rate

    162642 Calculate: Risk Free Rate Question: Assume that the risk-free rate of interest is 7.3% and that the market risk premium is 14.1%. What is the required rate of return on a stock that has a beta of 0.3?

  • Calculation of company cost of capital and WACC

    The market risk premium is the excess risk above that of the risk-free rate - this is calculated by subtracted the risk-free rate from the average risk on the market.

View More Related Solutions