The last dividend paid on stock ABC was $2 and the growth rates are forecasted t

Question

The last dividend paid on stock ABC was $2 and the growth rates are forecasted to g1 = 4% g2 = 5%, and g3 =2%. The stock has a systematic risk of beta ABC =1.25, the return on the market portfolio is =12% and the risk free rate of return is RF = 4%. a. Find the required rate of return for this stock using the CAPM. Find the equilibrium price of this stock. If the current market price of this stock is $11, should an investor buy or sell this stock? Explain briefly. How does the buying/ selling activity in (c) help to restore market equilibrium? A bond has 2 years to maturity. The coupon rate is 0% and the market rate of interest is 6%. Face value is M = 1000 Find the duration for the bond. If the market rate of interest changes to 7%. estimate the change in the price of the bond using duration. Calculate the actual change in the price of the bond by computing the new price. Why does the expected change in bond price differ from the actual? If the coupon rate was greater than zero, what would happen to the duration?

Explanation / Answer

a, 4+1.25(12-4)= 13.84%

B.5.022

c. sell

selling will help to decrease the price and get it to equilibrium

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