CAPM and stock valuation. Your aunt, Beth, plans to invest in the common stock of Smart-investment Corporation. Knowing that you are studying finance, she asks for your suggestion. Your calculation shows that yield on Treasury securities is 6%. You know that the S&P 500 Index’s expected annual return is 14%. Your econometric model tells you that beta of this company’s stock is 1.25. Aunt Beth tells you that this company just paid an annual dividend of $2. After collecting as much information about this firm as possible, you expect the firm’s dividend will grow at an annual rate of 7% forever. The stock is currently being sold for $25 per share.
The firm’s dividend of next year is expected to be _______.
a. $1.75 b. $2.00 c. $2.14 d. $2.44 23.
The market risk free rate is _____.
a. 6% b. 7% c. 14%
The expected return of the market portfolio is _____.
a. 6% b. 7% c. 14%
The valuation of the stock is _____.
a. $12.5 b. $13.375 c. $22.22 d. $23.78
Your suggestion to Aunt Beth is _____.
a. buy this stock because it is underpriced
b. do not buy this stock because it is overpriced
If shareholders are granted a preemptive right they will:
a. be given the choice of receiving dividends either in cash or in additional shares of stock.
b. be paid dividends prior to the preferred shareholders during the preemptive period.
c. be entitled to two votes per share of stock.
d. have priority in the purchase of any newly issued shares.
What market yield is implied by a share of common stock currently selling for $44 whose dividend just paid this year was $2.00 and is expected to grow at an annual rate of 10% forever?
a. 6% b. 9% c. 14.5% d. 15%