Question

Number 9

8 - Redo Ch. 6, problem #8 assuming that all of the information is the same except tha is 14%, the standard deviation of the stock fund is 30% and the correlation of the stock 9- US Treasuries yield 2%, the market risk premium is 5% and ABC's beta is 1.1 A What is ABC's required rate of return? B - If XYZ's required rate of return is 8.4%, what is its beta? 10 Global Asset Federal Financial (GAFF) is expected to pay a dividend of $1.00 nex grow 4.5% a year for the foreseeable future. GAFF's beta is 0.8, the risk-free rate is 2% A What is today's expected price when using the Dividend Discount Model? B- If GAFF's payout ratio is 70%, what is GAFF's ROE? C- How much of the price in A is due to growth opportunities?

Answer 1

Question 9

Based on CAPM,

Expected Return on Stock = Risk free rate + Beta * Market Risk premium

A) For Stock ABC,

Expected Return on Stock = 2% + 1.1 * 5%

Expected Return on Stock = 2% + 5.5% = 7.50%

B) For Stock XYZ,

8.4% = 2% + Beta * 5%

6.4% = Beta * 5%

Beta = 1.28