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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
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- Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? Use the dividend values provided in the table below for your calculations. Do not round your intermediate calculations. Year 0 1 2 3 4 5 6 Growth rate NA NA NA NA 60.00% 30.00% 8.00% Dividends $0.000 $0.000 $0.000 $0.250 $0.400 $0.520 $0.562 Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? Use the dividend values provided in the table below for your calculations. Do not round your intermediate calculations. Year 0 1 2 3 4 5 6 Growth rate NA NA NA NA 90.00% 45.00% 8.00% Dividends $0.000 $0.000 $0.000 $0.250 $0.475 $0.689 $0.744 Select one: a. $14.22 b. $12.97 c. $11.87 d. $15.62 e. $17.18Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? Year 0 1 2 3 4 5 6 Growth rate NA NA NA NA 50.00% 25.00% 8.00% Dividends $0.000 $0.000 $0.000 $0.250 $0.375 $0.469 $0.506 A. 9.94 B. 10.45 C. 10.99 D. 10.19 E. 10.72
- Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $1.50 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? Use the dividend values provided in the table below for your calculations. Do not round your intermediate calculations. 1 2 3 Year Growth rate Dividends Oa. $66.25 b. $79.02 c. $71.19 d. $64.58 e. $72.99 O Icon Key 0 NA $0.0000 ΝΑ $0.0000 NA $0.0000 ΝΑ $1.5000 4 60.00% $2.4000 5 30.00% $3.1200 6 8.00% $3.3696Agarwal Technologies was founded 10 years ago. It has been profitable for the last 5 years, but it has needed all of its earnings to support growth and thus has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a rate of 60% in year 4, 30% in year 5, and then to increase it at a constant rate of 8.00% thereafter. Assuming a required return of 11.00%, What is your estimate of the stock's current value? Do not round your intermediate calculations.Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $1.50 coming 3 years from today. The dividend should grow rapidly - at a rate of 46% per year - during Years 4 and 5; but after Year 5, growth should be a constant 8% per year. If the required return on Microtech is 17%, what is the value of the stock today? Round your answer to the nearest cent.
- The VSE Corporation currently pays no dividend because of depressed earnings. A recent change in management promises a brighter future. Investors expect VSE to pay a dividend of $0.5 next year (the end of year 1). This dividend is expected to increase to $1.25 the following year and to grow at a rate of 12 percent per annum for the following 2 years (years 3 and 4). Chuck Brown, a new investor, expects the price of the stock to increase 50 percent in value between now (time zero) and the end of year 3. If Brown plans to hold the stock for 2 years and requires a rate of return of 19 percent on his investment, what value would he place on the stock today? Use Table II to answer the question. Do not round intermediate calculations. Round your answer to the nearest cent. $Sawchuck Consulting has been profitable for the last 5 years, but it has never paid a dividend. Management has indicated that it plans to pay a $0.25 dividend 3 years from today, then to increase it at a relatively rapid rate for 2 years, and then to increase it at a constant rate of 8.00% thereafter. Management's forecast of the future dividend stream, along with the forecasted growth rates, is shown below. Assuming a required return of 11.00%, what is your estimate of the stock's current value? Year 0 1 2 3 4 5 6 7 Growth rate NA NA NA NA 50% 25% 8.00% 8.00% Dividends $0.000 $0.000 $0.000 $0.25 $0.38 $0.48 $0.52 $0.56 Use the rounded values of dividends (as given in the table above) for your subsequent calculations. Select the correct answer. a. $-20.32 b. $42.32 c. $47.54 d. $11.00 e. $37.10Microtech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Microtech to begin paying dividends, beginning with a dividend of $2.30 coming 3 years from today. The dividend should grow rapidly-at a rate of 23% per year-during Years 4 and 5; but after Year 5, growth should be a constant 6.2% per year. If the required return on Microtech is 10.30%, what is the value of the stock today? Question 11 options: $93.16 $90.13 $74.17 $60.96
- Amazing Co. is entering into a 3-year remodeling and expansion project. The constructionwill have a limiting effect on earnings during that time, but when it is complete, it shouldallow the company to enjoy much improved growth in earnings and dividends. Last year, thecompany paid a dividend of $3.40. It expects zero growth in the next year. In years 2 and 3,5% growth is expected, and in year 4, 15% growth. In year 5 and thereafter, growth shouldbe a constant 10% per year. What is the maximum price per share that an investor whorequires a return of 14% should pay for Amazing Co.’s ordinary share?Computech Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect Computech to begin paying dividends, beginning with a dividend of $0.50 coming 3 years from today. The dividend should grow rapidly-at a rate of 25% per year-during Years 4 and 5, but after Year 5, growth should be a constant 7% per year. If the required return on Computech is 15%, what is the value of the stock today? Do not round Intermediate calculations. Round your answer to the nearest cent. $ACME Corporation is expanding rapidly and currently needs to retain all of its earnings; hence, it does not pay dividends. However, investors expect ACME to begin paying dividends, beginning with a dividend of $2.50 coming 3 years from today. The dividend will grow rapidly - at a rate of 25% per year - during Years 4 and 5, but after Year 5, growth be a constant 5% per year. If the required return on ACME is 12%, what is the capital gains yield for the first year? 5% 12% 5.5% 0% 7%