Question 1: Genetech, Inc has just unraveled the secret to the aging process in a patentable new drug called ester Co-enzyme Beta. Because of this discovery Genetech's stock has just issued a dividend of $1.42 per share. Estimates have it that the dividend will grow before taxes by 5 percent for the next four years, decline by -3 percent for the two years as the firm is recouping costs, and then grow by 30 percent the next three years and continue growth at 7 percent for the foreseeable future. The capital gains rate is 30 percent, the dividend tax rate is 20 percent, and the risk free rate of return is 8 percent. Genetech's Beta is 2.00. The following are the expected returns on the market and their respective probabilities: 0.1 with a return of -6 percent; 0.15 with a return of 9 percent; 0.25 with a return of 14 percent; 0.25 with a return of 13 percent; 0.25 with a return of 24 percent. What is the price of Genetech's stock today? How risky is Genetech's stock? What is the coefficient of variation of the market portfolio and its standard deviation and variance? Should you buy Genetech's stock? Why?
Question 2: Genetech has bonds outstanding in addition to its stock and preferred stock. The bonds are 5 year, 6 percent semi-annual coupon bonds currently selling for $900 with a call provision at four years for $950. What is Gentech's yield to maturity and yield to call (do not use any approximate calculations)? What is the current yield and capital gains yield, if sold today?