1) What rate of return should an investor expect for a stock that has a beta of

Question

1) What rate of return should an investor expect for a stock that has a beta of 1.0 when the market is expected to yield 10% and Treasury bills offer 2%?

2)A stock is expected to have a dividend of $10 in one year and $11 in two years and then grow its dividend at a constant 10%/year forever. If the discount rate is 12%, what should be the current stock price?

3) Calculate the average collection period for Dotte Inc. if its accounts receivables were $500 and $600 at the end of each of the last two years, and its revenue over the last year was $3,000:

Explanation / Answer

1) expected return = 2+1*(10-2) = 10

2) price = 10/1.12 + 11/((0.12-0.1)*1.12^2) = 447.38

3) average collection period = 365*550/3000 = 66.92 days

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