Problem 6-1

Portfolio Beta

 

Your investment club has only two stocks in its portfolio; $20,000 is invested in a stock with a beta of 0.4, and $30,000 is invested in a stock with a beta of 1.7. What is the portfolio's beta? Round your answer to two decimal places.

_________

 

Problem 6-2

Required Rate of Return

 

AA Industries's stock has a beta of 1.7. The risk-free rate is 5%, and the expected return on the market is 13%. What is the required rate of return on AA's stock? Round your answer to two decimal places.

 

______%

 

 

Problem 6-3

Required Rate of Return

 

Assume that the risk-free rate is 7% and that the market risk premium is 7%.

 

What is the required rate of return on a stock with a beta of 0.9? Round your answer to two decimal places.

_________%

 

What is the required rate of return on a stock with a beta of 0.7? Round your answer to two decimal places.

_________%

 

What is the required return on the market? Round your answer to two decimal places.

______%

 

 

Problem 6-10

Portfolio Required Return

 

Suppose you manage a $3.825 million fund that consists of four stocks with the following investments:

Stock Investment Beta

A $260,000 1.50

B 675,000 -0.50

C 940,000 1.25

D 1,950,000 0.75

 

If the market's required rate of return is 9% and the risk-free rate is 4%, what is the fund's required rate of return? Do not round intermediate calculations. Round your answer to two decimal places.

 

___________%

 

Problem 7-1

DPS Calculation

 

Thress Industries just paid a dividend of $2.50 a share (i.e., D0 = $2.50). The dividend is expected to grow 9% a year for the next 3 years and then 14% a year thereafter. What is the expected dividend per share for each of the next 5 years? Round your answers to the nearest cent.

 

D1 = $ ______

 

D2 = $ ________

 

D3 = $ __________

 

D4 = $ __________

 

D5 = $ __________

 

Problem 7-2

Constant Growth Valuation

 

Boehm Incorporated is expected to pay a $2.40 per share dividend at the end of this year (i.e., D1 = $2.40). The dividend is expected to grow at a constant rate of 3% a year. The required rate of return on the stock, rs, is 9%. What is the value per share of Boehm's stock? Round your answer to the nearest cent.

 

$__________

 

Problem 7-4

Preferred Stock Valuation

 

Nick's Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $4 at the end of each year. The preferred sells for $35 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required return equal to the expected return)? Round the answer to two decimal places.

 

_________%

Problem 7-5

Nonconstant Growth Valuation

 

A company currently pays a dividend of $3.75 per share (D0 = $3.75). It is estimated that the company's dividend will grow at a rate of 25% per year for the next 2 years, then at a constant rate of 8% thereafter. The company's stock has a beta of 1.6, the risk-free rate is 5.5%, and the market risk premium is 4%. What is your estimate of the stock's current price? Round your answer to the nearest cent.

 

$ __________

 

Problem 7-7

Horizon Value

 

Current and projected free cash flows for Radell Global Operations are shown below.

 

Actual

2013

2014 Projected

2015

2016

Free cash flow $611.36 $672.04 $712.09 $761.94

(millions of dollars)

 

Growth is expected to be constant after 2015, and the weighted average cost of capital is 11.4%. What is the horizon (continuing) value at 2016 if growth from 2015 remains constant? Round your answer to the nearest dollar. Round intermediate calculations to two decimal places.

 

$ __________

 

Problem 7-9

Constant Growth Valuation

 

Crisp Cookware's common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 1.15; the risk-free rate is 5.6%; and the market risk premium is 5%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $33 a share. Assuming the market is in equilibrium, what does the market believe will be the stock's price at the end of 3 years (i.e., what is P3)? Do not round intermediate steps. Round your answer to the nearest cent.

 

$ _______

 

Problem 7-10

Preferred Stock Rate of Return

 

What is the required rate of return on a preferred stock with a $50 par value, a stated dividend of 8% of par, and a current market price of (a) $54, (b) $85, (c) $118, and (d) $149 (assume the market is in equilibrium with the required return equal to the expected return)? Round the answers to two decimal places.

 

A) ______ %

b) _____ %

c) ______ %

d) ________ %