Your stockbroker is trying to sell you a stock with a current market price of $54. The stock's last dividend (Do) was $1.45, and earnings and dividends are expected to increase at a constant growth rate of 12%. Your required return on this stock is 15%. From a strict valuation standpoint, you should: A. Buy the stock; it is fairly valued. B. Buy the stock; it is undervalued by $5.67 C. Buy the stock; it is undervalued by $.13. D. Not buy the stock; it is overvalued by $5.67 E. Not buy the stock; it is overvalued by $.13

Your stockbroker is trying to sell you a stock with a current market price of $54. The stock's last dividend (Do) was $1.45, and earnings and dividends are expected to increase at a constant growth rate of 12%. Your required return on this stock is 15%. From a strict valuation standpoint, you should: A. Buy the stock; it is fairly valued. B. Buy the stock; it is undervalued by $5.67 C. Buy the stock; it is undervalued by $.13. D. Not buy the stock; it is overvalued by $5.67 E. Not buy the stock; it is overvalued by $.13

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Please respond to both. You buy a stock when you expect that its price will rise, you short a stock when you expect that its price will fall. True or False. A stock has an expected dividend of $7 and a current price of $74. The required return on the stock is 14%, what is the stock’s capital gain’s yield?
A share of stock with a beta of 0.76 now sells for $51. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 3%, and the market risk premium is 7%. a. Suppose investors believe the stock will sell for $53 at year-end. Calculate the opportunity cost of capital. Is the stock a good or bad buy? What will investors do? (Do not round intermediate calculations. Round your opportunity cost of capital calculation as a percentage rounded to 2 decimal places.) b. At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
← 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.) ...
A stock has a holding period return (HPR) of 8% and a CAPM return of 9%. Which of the following is true? Select one: a. You should buy it since the actual return is greater than the fair return. b. You should not buy it since the fair return is greater than the actual return. c. You should buy it since the actual return is greater than the fair return. d. You should not buy it since the fair return is less than the actual return.
The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk-neutral probability of that the stock price will be $36? Choose the right answer: a. 0.3 b. 0.4 c. 0.5 d. 0.6
Your broker has recommended that you purchase stock in Beacan, Inc. Beacan recently paid its annual dividend ($7.00). Dividends have consistently grown at a rate of 2.50%. Analysts estimate that the stock has a beta of 1.42. The current risk-free rate is 2.80% and the market risk premium (RM - RF) is 6.50%. Assuming that CAPM holds, what is the intrinsic value of this stock?
Your brother-in-law, a stockbroker at Invest Inc. is trying to sell you a stock with a current market price of $25. The stock's last dividend (D0) was $2.00, the earnings and dividends are expected to increase at a constant growth rate of 10 percent. Your required return on this stock is 20 percent. From a strict valuation standpoint, you should ........ Select one: a. Not buy the stock; it is overvalued by $3.00 b. Not buy the stock; it is overvalued by $2.00 c. Buy the stock; it is undervalued by $2.00 d. Buy the stock; it is fairly valued. e. Buy the stock; it is undervalued by $3.00
Let the standard deviation of the continuously compounded return on the stock is 21 percent. Ignore dividends. Respond to the following. a) What is the theoretical fair value of the October 165 call? b) Based on your answer in part a, recommend a riskless strategy. c) If the stock price decreases by $1, how will the option position offset the loss on the stock
(a) An investor is considering an investment in XYZ stock. The risk-free rate of return is 0.45%, the market risk premium is 6.0% and XYZ’s beta is 0.81. Based on the CAPM, what is the investor’s required rate of return on the stock? Show all calculations. (b) XYZ’s stock is currently selling at a price of $42 a share. The investor strongly believes that a year from now the stock will be worth $43 a share. The investor also expects that XYZ will pay a dividend of $0.90 share during the coming year. If the investor buys the stock today and holds if for a year, what will her holding period return for the year be if her predictions come true? Show your work.
You are trying to develop a strategy for investing in two different stocks. The anticipated annual return for a $1,000 investment in each stock under four different economic conditions has the probability distribution shown to the right. Complete parts (a) through (c) below. Probability 0.1 0.2 0.4 0.3 a. Compute the expected return for stock X and for stock Y. The expected return for stock X is (Type an integer or a decimal. Do not round.) Economic Condition Recession Slow growth Moderate growth Fast growth Returns Stock X Stock Y - 40 30 80 150 - 110 40 140 210
As an investor you have a required rate of return of 14 percent for investments in risky stocks. You have analyzed three risky firms and must decide which (if any) to purchase. Your information as below: (i) Use the dividend-growth model to estimate the value of each stock. Justify which (if any) should you buy.(ii) If you purchased Stock A, determine your implied rate of return.(iii) Determine the price that would be required to persuade you to purchase Stock A if your required rate of return were 10%.
The risk-free rate of return is 2 percent, and the expected return on the market is 6.1 percent. Stock A has a beta coefficient of 1.3, an earnings and dividend growth rate of 5 percent, and a current dividend of $1.50 a share. Do not round intermediate calculations. Round your answers to the nearest cent. a. What should be the market price of the stock? $ b. If the current market price of the stock is $81.00, what should you do? The stock -Select- ✓ be purchased. c. If the expected return on the market rises to 14.1 percent and the other variables remain constant, what will be the value of the stock? $ d. If the risk-free return rises to 5 percent and the return on the market rises to 14.3 percent, what will be the value of the stock? $ e. If the beta coefficient falls to 1.2 and the other variables remain constant, what will be the value of the stock? $ f. Explain why the stock's value changes in c through e. The increase in the return on the market -Select- ✓the required return and…

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