Question: Company Q has earnings of $3.00 per share, a market price of $25, and a beta of 1.25. The risk-free rate is 3% and the risk premium for the market as a whole is 5%.
1. What is the general formula for the securities market line (for te market as a whole?)
2. What is the expected return on the market?
3. Using the formula from #1, what is the "reward-to-risk ratio" for the market as a whole?
4. What is the current P/E ratio for Company Q?
5. What is the current rate of return for investing in company Q?
6. What is the current "reward-to-risk ratio" for Company Q?
7. If the market remains stable, what will be the expected return eventually become for Company Q?
8. At this new expected return for Company Q, what will be its new stock price?