1. Based on the next year’s dividend, the dividend yield of a stock is 5.5%. The

Question

1. Based on the next year’s dividend, the dividend yield of a stock is 5.5%. The dividend growth rate is assumed to be 4%. What is the required rate of return for the stock?

a.1.5%                        b.4.18%                      c.5.72%                      d.9.50%

2. The price of book ZXY is 2x while its peers are trading around 3x. What would be the implied price of ZXY if its book value per share if $35 and it’s worth as much as its peers?

a.$105                        b.$70                          c.$17.5                       d.$11.67

3. In order to find the Minimum Variance Portfolio (MVP), which constraints do you include in the Markowitz’s portfolio variance minimization process? Assume no short sale is allowed.

          I) Expected Return = a specified return

          II) The weight on each stock must be greater than or equal to zero

          III) The sum of all weights must add to 100%

a.I only                       b.II and III only           c. I and III                   d.I, II, and III

4. Firm ZXY has $20 mil in Debt, $30 mil in Book Value, $90 mil in Total Asset and a market value of $65 mil. The earning for the year is $8 mil. Its return on capital is

a.16.0%                      b.9.4%                        c.8.89%                      d.5.71%

Explanation / Answer

1

Required return=dividend yield+growth rate=5.5%+4%=9.5%

2

Price=35*3=105

3

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