Part A Equity Valuation.

A share of Company Z preferred stock pays a quarterly dividend of $3.80. If investors require a 12 percent rate of return, what should be the price of this preferred stock?

2 Over the past few years, Company A has retained, on the average, 70 percent of its earnings in the business. The future retention rate is expected to remain at 70 percent of earnings, and long-run earnings growth is expected to be 10 percent. If the risk-free rate, kRF, is 8 percent, the expected return on the market, kM, is 12 percent, Company A's beta is 2.0, and the most recent dividend, D0, was $1.50,what is the most likely market price and P/E ratio (P0/E1) for Company A's stock today? (Hint: Start by finding the required rate of return for Company A's investors.)

3 You are considering the purchase of a common stock that just paid a dividend of $2.00. You expect this stock to have a growth rate of 30 percent for the next 3 years, then to have a long-run normal growth rate of 10 percent thereafter. If you require a 15 percent rate of return, how much should you be willing to pay for this stock?

Part B: Risk and Return
1 Karen Wallace currently has an investment portfolio that contains 10 stocks that have a total value equal to $160,000. The portfolio has a beta (b) equal to 1.0. Karen wants to invest an additional $40,000 in a stock with b = 2.0. After Karen adds the new stock to her portfolio, what will be the portfolio's beta?

2 Given the following information, compute the expected return, standard deviation and coefficient of variation for Company B.: Probability Return
probability return
0.2 2.0%
0.3 12.0%
0.5 5.0%