1. A stock with a beta of 1.5 has a required return of 14%. If the expected (req

Question

1. A stock with a beta of 1.5 has a required return of 14%. If the expected (required) return on the market is 11%, then what is the risk free rate?

2. A stock currently pays no dividends, however, it expects to pay a dividend of $1 four years from now. From that point onward, dividends are expected to grow by 10% per year forever. What is the fair price for this stock if it has a required return of 14%?  

3. A firm had Net Income of $1,000,000 and a payout ratio of 60%. If they are 60% equity financed, how much can they spend on capital expenditures before needing external equity?

4. Which of these features benefits small shareholders?

a)     Cumulative Voting

b)    Founders Shares

c)     Poison Pills

d)    Staggered Boards

Explanation / Answer

1. If x is the risk free rate

.14= x +1.5 (.11-x)

Solving for x we get a rate of .05

1*1.10/(.14-.10)/(1.14)^4= 16.28

1,000,000*.4*.6= 240,000

a) cumulative voting because it allows small shareholders to put all their votes on one candidate or issue.

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