Question

5) a) The Iron Bank of Braavos just paid a S10 dividend on preferred shares which is expected to grow annually by 5% per year. If the discount rate is 8%, what must the price of a preferred share be today? Next year a company is expected to pay $2 as a dividend. Its return on equity is generally 300, the discount rate 5%, and the company usually retains about 40% of its earnings. What is the price of a common share of stock? b) c) Med Sci Inc. Just paid $0.50 per common share dividend which is expected to grow by 10% each year into the indefinite future. If the market discount rate for Med Sci Inc. common stock is 14%, what must the price of a common share of stock be today? d) An analyst reports that SSH Inc. is expected to have a 8% return next quarter. If the current t-bill rate is 200, what does this analyst think SSH Inc.'s risk premium must be based on historical approach? Suppose there is 50% chance of a 1% gain on a stock and a 50% chance of a 1% loss on a stock. What is the expected standard deviation of this stock's return? e) f) If the market risk premium is 5%, the risk-free rate is 3%, and the estimated expected return on a stock is 790, what must be the estimated "beta" for that stock?

Answer 1

1
=10*1.05/(8%-5%)=350

2
=2/(5%-3%*40%)=52.6315789473684

3
=0.5*1.1/(14%-10%)=13.75

4
=8%-2%=6%

5
=SQRT(50%*(1%-0%)^2+50%*(-1%-0%)^2)=1%

6
=(7%-3%)/5%=0.8