Part 1: Which one of the following stocks is correctly priced if the risk-free r

Question

Part 1: Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5 percent and the market risk premium is 7.50 percent? Stock Beta Expected Return A 0.72 8.53% B 1.50 13.80% C 1.39 12.93% D 1.05 10.61% E 0.96 9.84% 1) Stock A 2) Stock B 3) Stock C 4) Stock D 5) Stock E Part 2: Southern Home Cookin' just paid its annual dividend of $.70 a share. The stock has a market price of $32 and a beta of 0.8. The return on the U.S. Treasury bill is 4 percent and the market risk premium is 12 percent. What is the cost of equity? A)11.07 percent B) 13.60 percent C) 9.64 percent D) 15.32 percent E) 17.20 percent Part 3: Grill Works and More has 8 percent preferred stock outstanding that is currently selling for $55 a share. The market rate of return is 11 percent and the firm's tax rate is 34 percent. What is the firm's cost of preferred stock? A) 13.22 percent B) 8.73 percent C) 9.60 percent D) 11.95 percent E) 14.55 percent

Explanation / Answer

A) D) A) B) C) D)

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