4) III. The following stock quotation for Wells Fargo Stock ( December 1t 2017 w

Question

4) III. The following stock quotation for Wells Fargo Stock ( December 1t 2017 when market closed at 4:00 PM Easter WFC) reported on Friday Wells Fargo & Company (WFC) 56.47-0.21 (-0.37%) NYSE Previous Close 56.68 , At close: 4:00PM EST arket C Beta E Ratio (TTM) EPS (TTM) 278.073B id sk ay's Range 57.03 56.58 x1,200 56.59x 2500 56.38-57.33 1.05 14.59 3.87 Jan 12, 2018 arnings Date 52 Week Range 49.27-59.99 Volume Avg. Volume 17.559.459 Dividend &Yield; Ex-Dividend Date ly Target Est 1.56 (2.76%) 2017-11-02 57.69 30,984.403 (1) What was De cember Ist close price of WFC stock? How did it change from previous day November 30)? (2) If you purchased WFC stock at the 52 wecks low and sold it at close price on December 1, 2017. You have received dividend during this holding period. Calculate your holding period rate of return (4) Currently, the 3-month T-bill interest rate is 1.3%, and required return on the stock market (5) Assume the dividend growth rate is 10%, calculate the true value and annual rate of (6) Draw a security market line (SML) using the data above. Determine the i (7)According to the CAPM model, will you buy WFC stock or not? Why? (35 points) (3) Show how the 2.76% yield is calculated. is 121%. Calculate required rate of return of wFC stock using the CAPM model. return using Gordon model. and slope of the SML

Explanation / Answer

1. Close:56.47, change=-0.21 or -0.37%
2. bought at 49.27 and sold at 56.47 and recieved 1.56..holding period return=(selling price+dividends-purchase rpice)/purchase price=(56.47+1.56-49.27)/49.27=17.7796%
3.
=Dividend/Current Price=1.56/56.47=2.76%
4.
CAPM says required return=risk free+beta*market risk premium=risk free+beta*(market return-risk free)=1.3%+1.05*(12.1%-1.3%)=12.64%
5.
True Value or Fair Value=Expected dividends/(required return-growth rate)=1.56*1.1/(17.7796%-10%)=22.05769
6.
7.
I will not buy the stock as current price is more than the fair value

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