1) A stock has a required return of 9%. The risk-free rate is 5% and the market risk premium is 3%. What is the stock's beta? If the market risk premium increased to 4%, what would happen to the stock's required rate of return? Assume that the risk-free rate and the beta remain unchanged
2) Magoo Contacts & Glasses, Inc. is expected to generate 300 million in free cash flow next year, and the FCF is expected to grow at a constant rate of 3% per year indefinitely. Magoo has no debt or preferred stock, and its WACC is 8%, If Magoo has 40 million of shares of stock outstanding what is the stock's value per share?
Then, please answer the following question: How can CAPM be used to estimate a stock's required rate of return?
3) Williams has a beta of 2.0 while Hemberg has a beta of 0.4. The risk-free rate is 5%, and the required rate of return on an average stock is 12%. The expected rate of inflation falls by 1%, the real risk-free rate remains constant, the required return on the market falls to 10%, and all betas remain constant. After all these changes what will be the difference in the required return for Williams and Hemberg.
4) VeggieStrips has been growing at a rate of 8% per year in recent years. This growth is expected to last for another 3 years, then decline to 3%.
a. If D(0) = $1.60 and r(s) =10%, what is VS stock worth today? What are their expected dividends and capital gains yield at this time (year1)?
b. Assume that VS period of 8% a year growth will last 6 years instead of 3. How would this affect the price, dividend yield, and capital gains yield? Answer in words only.
c. What will VS dividend yield and capital gains yield be once the 8% growth ends?
d. Of what interest to investors is the changing relationship between dividend and capital gains yields over time?