1. A certain stock has a beta of 1.3. If the risk-free rate of return is 3.2 per
ID: 2649950 • Letter: 1
Question
1. A certain stock has a beta of 1.3. If the risk-free rate of return is 3.2 percent and the market risk premium is 7.5 percent, what is the expected return of the stock? What is the expected return of a stock with a beta of .75?
2. Could I Industries just paid a dividend of $1.10 per share. The dividends are expected to grow at a 20 percent rate for the next six years and then level off to a 4 percent growth rate indefinitely. If the required return is 12 percent, what is the value of the stock today?
Explanation / Answer
Answer:
Calculation of Expected return:
Expected Return = Risk Free rate +( Beta * Market Risk Premium )
= 3.2% + (1.3 * 7.5%)
= 12.95%
Expected return of a stock with a beta of 0.75:
= 3.2% + (0.75 * 7.5%)
=8.825%
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