1. A stock is selling for $50 in the market. The company’s beta is 1.2, the mark
ID: 2621171 • Letter: 1
Question
1. A stock is selling for $50 in the market. The company’s beta is 1.2, the market risk premium (rM - rF) is 5%, and the risk-free rate is 3%. The next dividend expected to pay is D1 = $2 and the dividends are expected to grow at a constant rate g. What’s the dividend growth rate g for this stock?
3.00%
4.19%
4.81%
5.00%
Using the information from Question1, find the stock’s capital gain yield.
3.00%
4.19%
4.81%
5.00%
Using the information from Question1, find the stock’s dividend yield.
4.00%
4.19%
4.81%
5.00%
2. A retail store is offering a diamond ring for sale for 50 months at $88 per month. The retail price of the ring is $3,900. What is the interest rate on this offer?
A. 10.5%
B. 11.2%
C. 12.1%
D. 12.6%
3. At maturity, the value of either premium bond or discount bond equals to its par value.
True.
False.
Which of following factors may affect stock price?
A.Inflation expectations
B.Risk aversion
C.Company-specific risk
D.The change of dividend growth rate g
E. All of above
3.00%
4.19%
4.81%
5.00%
Explanation / Answer
1. 5.00% ,
Required rate of return =risk free rate + beta * market risk premium
=3% + 1.2*5%
=3% + 6%
= 9%
Stock price = next year dividend / (required rate - growth rate)
$50 = $2 / (9% - growth rate)
$4.5 - $50 growth rate = $2
$4.5 - $2 = $50 growth rate
growth rate = $2.5 / $50
growth rate = 5%
5.00%
stock’s capital gain yield = [stock price after year - current stock price] / current stock price
= [{50*(1+0.05)} -50 ] / 50
= [52.5 -50 ] / 50
= 2.5 / 50
= 5.00%
4 % ,
stock’s dividend yield = dividend / current stock price
= $2 / $50
= 4%
3) True , at maturity bonds , bonds face value are paid to their holders whether it was discounted bond or issued on premium
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