stoka i e company\'s net earning E (cash flow) reached 2 million int Up until ye

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stoka i e company's net earning E (cash flow) reached 2 million int Up until year o, the with a beta of 1.5. The dividend per share in period o. Do-i Asst e CAPM 1.1a, Management, a London-based corporation, has 1 million shares of conmon company's stock price at time 0 is-10 pound per share. The rompany's """""", ",..k i, u and stock prices are consistent with constant dividend growth rate model . (a). Assume the expected ret urn on the market portfolio is E(%)-11% and the risk free rate is ry = 3%. what is investors' required rate of return on Goldeneat's amnion-tork? (5 poists) 1.S (b). Jeffery, the CEO of Goldencat, announces at the end of period O, that company is expected to swe a net earning growth of q = 7.5% for the foreseeable future, an inmits to a dividend payout ratio of 50% That is Et If the stock market believes in Jeffery's promise, what will the stock price be? what is the rate of return on holding Goldencat's common stock from between O to period 1? (5 points) (c). Shortly after his announcement, rumors spread such that Jeflery might have exaggerate the company's earning growth potential, where the true earning growth rate might only be 2.5%. Tliere are also indications that he might sell some of the company shares be owned in period 1. If the rumors were true, what will the stock price Pt be? . (d). The financial market assigned .-70% probability that Jeffery liol, nnd-,-30% probal ili? that he did not. The uncertainty will be retalved in period 1, and the stock preewill ith Pt. What is the period 0 expected return and standard deviation of returns on holding Gollencat common stock between period 0 and period 1? be / ur . (e). In the midst of rumors, the board of directors of Goldencat receives a hostile takooner tul b DragonCorp who would purchase 510,000 shares at 11 pounds per share. If the board approves the Hint: in general, stock return from period t to period t + 1 is defined a

Explanation / Answer

a) = 1.5 Rm = 11% Rf = 3% Expected Return on Asset (E) = Rf + (Rm - Rf) Expected Return on Asset (E) = 0.15 b) Growth (g) = 7.5% Dividend payout ratio = 85% Stock Price (P) = D/E-g Pt+1 = 11.33 Stock return from period t to t+1 (Rt+1) = Pt+1 + Dt+1 - Pt Here, Pt+1 = 11.33 Dt+1 = 0.1275 (85%*0.15) Pt = 10 Rt+1 = 1.46 c) Growth (g) = 2.50% Dividend payout ratio = 85% Stock Price (P) = D/E-g P = 6.8

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