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Do problems below. Submit your work using an Excel file. You must show your work.
1. Given that the standard deviation of a stock return is 30%, its correlation coefficient with the market portfolio return is 0.75, and that the standard deviation of the market portfolio return is 25%.
(1) Use Corrl (stock return, S&P500 return) x STDEV(Standard deviation of stock return)/ STDEV (standard deviation of S&P50 return) to find beta of the stock.
(2) Use the security market line or capital asset pricing model to find the required rate of return of the stock, assuming market return is 12% and risk free rate is 3%.
2. Assume a stock that has a payout ratio of 30%, a current dividend of $2, a return on investment of 12%, and a beta of 1.45. Its dividends are assumed to grow at a constant rate. Assume market return of 12% and risk-free rate of 3%.
(1) Find the growth rate.
(2) Estimate the expected future dividends for the next 50 years.
(3) Find the require rate of return.
(4) Find the present value of expected future dividends and the sum of all.
(5) Use the constant growth rate model V0= D1/(K-g) to find the value of the stock.
(6) Compare your answer to (4) and (5).
3. Assume a stock that will pay dividends of $1.55 each year for the next five years and will have an expected price of $25 in five years. It has a beta of 0.86. Market return is 12% and risk-free rate is 3%.
(1) Find its required rate of return.
(2) Find its value.
(3) If stock price is $18, what is the expected return? Is the price low or high? Is the expected return low or high? Is this stock a good investment? Explain.
(4) If stock price is $22, what is the expected return? Is the price low or high? Is the expected return low or high? Is this stock a good investment? Explain.
1. Submit a working Excel file . Use formulas that are shown in formula bar to derive your answers. Do not type in your answers.
2. You must show your work.
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