Two stocks each pay a $1 dividend that is growing annually at 4 percent. Stock A's beta = 1.3; stock B's beta = 0.8. a. Which stock is more volatile? b. If Treasury bills yield 2 percent and you expect the market to rise by 8 percent, what is your risk-adjusted required return for each stock? c. Using the dividend-growth model, what is the maximum price you would be willing to pay for each stock? d. Why are their valuations different?
What will be an ideal response?
a. Stock A is more volatile because it has the higher beta coefficient.?b. Required rate of return = rf + (rm - rf)beta For stock A: Required rate = .02 + (.08 - .02)1.3 = 9.8%? For stock B: Required rate = .02 + (.08 - .02)0.8 = 6.8%?c. Valuation of stock A: V =D0(1 + g)=$1.00(1 + .04)= $17.93 k - g .098 -.04? Valuation of stock B:? V = D0(1 + g) = $1.00(1 + .04) = $37.14 k - g .068 -.04??d. Even though the dividends and growth rates are equal, stock A is riskier (higher beta) which reduces its valuation.
You might also like to view...
Regarding customer satisfaction surveys:
A) should be administered to every customer or else the data will be distorted. B) the most important thing is what you do with customer responses. C) the more frequent the better. D) should be loosely worded so that the customer can express himself or herself.
Pricing of services
a. requires the same approach as pricing of products. b. uses a markup percentage to add the cost of overhead to the direct costs of labor, materials, and parts. c. always requires three pricing computations, one for materials, one for parts, and one for labor. d. is less accurate than pricing of products.
Selected vendors become an integral part of the production team's quality efforts and may contribute to product design
Indicate whether the statement is true or false
InLinK Inc incurred a cost of $ 48,000 for material, $20,000 for labor, and $60,000 for factory overhead. There was no beginning or ending work in process. 8,000 units were completed and transferred out. The unit cost for material is:
a. $ 6.0 b. $ 7.5 c. $ 8.0 d. $15.0