What is the expected rate of return on a stock that has a beta of 1.48 if the ma
ID: 2649900 • Letter: W
Question
What is the expected rate of return on a stock that has a beta of 1.48 if the market risk premium is 8.0 percent and the risk-free rate is 3.3 percent?
14.21 percent
15.14 percent
11.13 percent
13.28 percent
You own a $38,000 portfolio that is invested in a risk-free security and Stock A. The beta of Stock A is 2.77 and the portfolio beta is 1.28. What is the amount of the investment in Stock A?
$14,920
$17,560
$18,380
$20,120
Excelor stock is expected to pay $3.00 per share as its next annual dividend. The firm has a policy of increasing the dividend by 11.0 percent annually. The stock has a market price of $13.65 and a beta of 2.8. The market risk premium is 8.56 percent and the risk-free rate is 4.90 percent. What is the cost of equity?
31.31 percent
30.27 percent
30.92 percent
29.84 percent
12.40 percent
13.01 percent
8.27 percent
9.21 percent
What is the expected rate of return on a stock that has a beta of 1.48 if the market risk premium is 8.0 percent and the risk-free rate is 3.3 percent?
Explanation / Answer
SOLUTION:
1. Calculation of expected return.
Rate of return = 0.033 + 1.48 (0.08)
Rate of return = 0.033 +0.1184
Rate of return = 15.14 percent
3. Calculation of cost of equity.
Excelor stock is expected to pay $3.00 per share as its next annual dividend. The firm has a policy of increasing the dividend by 11.0 percent annually. The stock has a market price of $13.65 and a beta of 2.8. The market risk premium is 8.56 percent and the risk-free rate is 4.90 percent. What is the cost of equity?
Dividend growth: $3.00 / $13.65 + 0.11 = 0.3297
CAPM: 0.049 + 2.8 (0.0856) = 0.2886
Cost of equity = (0.3297 + 0.2886) / 2
Cost of equity = 30.92 percent
4. Calculation of cost of preferred stock
Cost of preferred = (0.085 * $100) / $92.30
Cost of preferred = 9.21 percent
5. Calculation of pre-tax cost of debt
N= 14
PV=
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