1 The stock of Big Joe\'s has a beta of 1.58 and an expected return of 13.00 per

Question

1

The stock of Big Joe's has a beta of 1.58 and an expected return of 13.00 percent. The risk-free rate of return is 5.5 percent. What is the expected return on the market?

a. 16.19 percent

b. 4.31 percent

c. 7.50 percent

d. 10.25 percent

e. 8.67 percent

2

Which one of the following stocks is correctly priced if the risk-free rate of return is 3.6 percent and the market risk premium is 8.3 percent?

     

Stock C

Stock D

Stock A

Stock E

Stock B

3

Jensen's Travel Agency has 8 percent preferred stock outstanding that is currently selling for $38 a share. The market rate of return is 15 percent and the firm's tax rate is 34 percent. What is Jensen's cost of preferred stock?

5.28 percent

7.16 percent

21.05 percent

39.47 percent

6.89 percent

The stock of Big Joe's has a beta of 1.58 and an expected return of 13.00 percent. The risk-free rate of return is 5.5 percent. What is the expected return on the market?

Explanation / Answer

1. expected return = risk free rate +beta*(market return - risk free rate)

13% = 5.5%+1.58*(market return - 5.5%)

7.5% = 1.58(market return - 5.5%)

4.75% = market return - 5.5%, or market return = 4.75+5.5 = 10.25%. Answer is option "d".

2. using the formula,

expected return = risk free rate+beta*market premium. i have calculated the expected return for the stocks.

So answer is Stock C.

3. cost of preferred stock = dividend/current market price

dividend = 8% of par value. let par value be "x". current market price = $38

dividend = 0.08x

market return = (dividend+(market price - par value))/par value

= (0.08x+38-x)/x = 15%

=(38-0.92x)/x = 15%

38 - 0.92x = 0.15x

38 = 1.07x

x = 35.51

cost of preferred stock = 8% of 35.51/38

= 2.84/38 = 7.47%

dividend =

Stock Beta risk free rate market risk premium Beta*market premium Risk free rate+beta*market premium A 0.75 3.60% 8.30% 6.23% 9.83% B 1.54 12.78% 16.38% C 1.2 9.96% 13.56% D 1.3 10.79% 14.39% E 0.9 7.47% 11.07%

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