If the stocks are less risky than bonds, then the risk premium on stock may be zero.  Assuming that the risk-free interest rate is 2 percent, the growth rate of dividends is 1 percent and the current level of dividends is $70, use the dividend-discount model to compute the level of the S&P 500 that is warranted by the fundamentals.  Compare the result to the current S&P 500 level of 4300, and explain one possible reason for the difference.

Suppose the market risk premium is 5% and the risk-free interest rate is 4%. Using the data, calculate the expected return of investing in a. Starbucks’ stock-Equity Beta:0.80b. Hershey’s stock-Equity Beta:0.33c. Autodesk’s stock-Equity Beta:1.72

Stock Z has a beta of 2 and an expected return of 10%. If Treasury Bills currently return 1% and the expected return on the S&P 500 is 7%, is this stock correctly priced, underpriced, or overpriced? Graph the security market line and Stock Z. Label all relevant details. What does beta represent? Explain the concept of market efficiency using your graph

← You are thinking of buying a stock priced at $109.31 per share. Assume that the risk-free rate is about 4.03% and the market risk premium is 6.48%. If you think the stock will rise to $118.76 per share by the end of the year, at which time it will pay a $3.48 dividend, what beta would it need to have for this expectation to be consistent with the CAPM? The beta is (Round to two decimal places.) ...

You expect the risk-free rate to be 4 percent and the market return to be 10 percent. You also have the following information about three stocks. Current Expected Expected Stock Beta Price Price Dividend U 1.5 $10 $11.50 $1.00 N 1.1 $27 $30 $0.00 Ο 0.8 $35 $36 $1.50 (Question 2 of 2) What is the required rate of return (based on the CAPM) for an equally weighted portfolio of the three stocks? (Enter your answer as a percentage, i.e., "10.25" for 10.25 percent

You live in a world where assets are priced by the CAPM. The following information is given to you regarding stock X. The expected payoff from the stock X=£105.00 Expected return of stock X = 18% Risk-free rate =5% Market Risk Premium = 9%   Assume there are no other changes, except that the correlation between the returns of Stock X and the market becomes twice what it is currently. How would this change affect the current price of Stock X? Explain why the change of the correlation causes the observed change in the stock price. [hint: Provide a risk-based explanation]

Answer the following a) When will the different DCF methods use the same discount rate? b) The cost of debt (ka) will change as the capital structure of a firm changes. Why or why not? c) Why does the cost of equity (k.) increase as the amount of debt in the capital structure of a firm increases? Why? d) Freebie Inc.'s common stock has a beta of 1.3. If the risk-free rate is 4.5% and the expected return on the market is 12%, what is its cost of equity capital? e) Why do branded food companies command the highest EBIT multiple (about 8) and transportation companies the lowest (about 3)? f) Should a firm use its cost of capital as a hurdle/discount rate to value all internal divisions? Why or why not? g) An option can have more than one source of value. Consider a mining company. The company can mine for ores today or wait another year (or more) to mine. What real options can you identify here? h) Do you consider dividend payments by the firm in calculating cash flows? Why or why not? i)…

A financial analyst for the ZZZ Corporation uses the Security Market line to estimate the cost of equity, Re. The analyst observes the current risk-free interest rate, Rf, is 3%. The analyst estimates that ZZ has a beta of 2. If the analyst finds that RE is 13%, what does the analyst use as the value of [E(RM) – R¡]? -

Assume that if M launches a new e-trading platform, its price will go up to $261. Else, M price will go down to $62. You are aware that M shares are being traded at $162. You also know that the risk-free rate is 5%.What is the probability that M price will go down?***Please round your answer to the nearest three decimals (i.e. 0.512)

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