1. You hold a portifolio with the following securities: Security Percent of port

Question

1. You hold a portifolio with the following securities:

Security Percent of portfolio Beta
Stock A 23% 1.50
Stock B 48% 1.32
Stock C 29% 1.87

Calculate the beta portfolio

Round the answers to two decimal places.

All the work has to be shown!

2. Calculate the expected return on stock:

Round the answers to two decimal places in percentage form.

All work has to be shown!

3. The Black Bear Company just paid an annual dividend of $5.98. If you expect a constant growth rate of 8% percent, and have a required rate of return of 12.65 percent, what is the current stock price according to the constant growth dividend model (Gordon model)?
Round the answers to two decimal places.

All the work has to be shown!

4. You are considering the purchase of a share of Blue Grass, Inc. common stock. You expect to sell it at the end of one year for $87 per share. You will also receive a dividend of $5.36 per share at the end of the next year. If your required return on this stock is 7.39 percent, what is the most you would be willing to pay for Blue Grass, Inc. common stock now?
Round the answer to two decimal places.

All the work has to be shown!

State of the economy Probability of the state Percentage returns on stock Economic recession 25% -8.5% Boom 12% 15.6% Steady economic growth 63% 3.4%

Explanation / Answer

1) Beta portfolio = Weight of Stock A * beta of Stock A + Weight of Stock B* beta of Stock B + Weight of Stock C * beta of Stock C

Beta portfolio = 23%*1.50 + 48%*1.32 + 29%*1.87

Beta portfolio = 1.52

2) Expected Return on Stock = Prob. of Econ * Return on Stock on Econ + Prob of Boom * return on Boom + Prob of Steady * return on steady

Expected Return on Stock = 25% * -8.5 + 12%*15.6 + 63% * 3.40

Expected Return on Stock = 1.89%

3) As per Constant Growth Dividend Model (Gordon Model)

Current Stock Price = Expected Dividend/(Required rate - growth rate)

Expected Dividend = 5.98*(1+8%)

Current Stock Price = 5.98*(1+8%)/(12.65%-8%)

Current Stock Price = 138.89

4) You willing to pay for common stock = (87+5.36)/1.0739

You willing to pay for common stock = $ 86

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