Assignment:
Please complete the problems. Don't round - use four decimal places until the final answer.
1. AA Corporation's stock has a beta of 1.6. The risk-free rate is 2.5% and the expected return on the market is 14.5%. What is the required rate of return on AA's stock?
2. The market and Stock J have the following probability distributions:
Probability r m r J
0.2 13% 18%
0.3 9 5
0.5 18 12
Calculate the expected rates of return for the market and Stock J.
3. Suppose you manage a $6 million fund that consists of four stocks with the following investments:
Stock Investment Beta
A $900,000 1.70
B 1,100,000 -0.70
C 1,500,000 1.15
D 2,500,000 0.85
If the market's required rate of return is 12% and the risk-free rate is 3%, what is the fund's required rate of return?
4. Boehm Incorporated is expected to pay a $1.50 per share dividend at the end of this year (i.e. D1 = $1.50). The dividend is expected to grow at a constant rate of 11% a year. The required rate of return on the stock, r is 15%. What is the estimated value per share of Boehm's stock?
5. Nick's Enchiladas Inc. has preferred stock outstanding that pays a dividend of $9.50 at the end of each year. The preferred sells for $92 a share. What is the stock's required rate of return
6. A company currently pays a dividend of $4 per share (D0= $4). It is estimated that the company's dividend will grow at a rate of 10% per year for the next 2 years, and then at a constant rate of 5% thereafter. The company's stock has a beta of 1.6, the risk-free rate is 4% and the market risk premium is 2%. What is your estimate of the stock's current price?