QUESTION 1:
1. The expected return of a stock is 10%. The risk free rate (T-bill rate) is currently 2% and the return of the S&P500 index (as a proxy of market return) is 6%. What is the beta of the stock?
2. Calculate the expected return of a stock using the Capital Asset pricing model, based on the following information: The risk free rate is 1%, the beta of the stock is 0.2 and the market risk premium is 5%.
3. Based on this above information, and using the CAPM equation, what is the return of the entire stock market?
QUESTION 2:
1. Use the dividend discount model and the following information to calculate the price of XYZ stock:
Retention ratio (b) = 60%; ROE = 20%; Current earnings (E1) =$5/share, and the required rate of return on the stock (k) = 12.5%
2. What would happen to the price of XYZ stock if the company decides to pay out all of its earnings in dividends? From that, infer the stock's present value of growth opportunities (PVGO). Assume all the other information given in question a. remains the same.
3. What would happen to the price of the stock if now the ROE of the firm is only 10%, lower than the required rate of return? Compare the firm's stock price with a ROE of 10% to that of the firm's ROE of 20%. Use all information given in question 1