A. Value and Price You plan on holding a stock for two years. The annual dividen
ID: 2825069 • Letter: A
Question
A.
Value and Price You plan on holding a stock for two years. The annual dividend per share is $0.77 and you believe you will be able to sell the stock in two years for $26.00. You believe this stock should pay a 8% rate of return per year. If the stock is currently priced at $22.00 the stock is __________________.
overvalued by less than 5%
overvalued by more than 5%
undervalued by less than 5%
undervalued by more than 5%
B.
Value and Returns A stock has an expected dividend yield of 4.8% a price today of $41 and an expected sale price in one year of $45. The stock has a beta of 0.5 and the expected return on the market is 14% while the risk free rate is 6%. This stock is _____________ by ________ basis points.
overvalued; 456
undervalued; 152
overvalued; 152
undervalued; 456
Value and Price You plan on holding a stock for two years. The annual dividend per share is $0.77 and you believe you will be able to sell the stock in two years for $26.00. You believe this stock should pay a 8% rate of return per year. If the stock is currently priced at $22.00 the stock is __________________.
Explanation / Answer
1-
required rate of return
8%
rate of return
dividend yield + capital gain yield
dividend yield
total dividend earned/ purchase price
(.77*2)/22
7%
capital gain yield
(future price-current price)/current price
(26-22)/22
18%
total rate of return
25%
required rate of return
8%
overvalued by more than 5%
17%
2-
required rate of return
risk free rate+(market return-risk free return)*beta
6+(14-6)*.5
10%
rate of return
dividend+(future price-present price) / present price
1.968+(45-41)/ 41
14.56%
Difference in rate of return
14.56-10
0.0456
Overvalued by 456 point
1-
required rate of return
8%
rate of return
dividend yield + capital gain yield
dividend yield
total dividend earned/ purchase price
(.77*2)/22
7%
capital gain yield
(future price-current price)/current price
(26-22)/22
18%
total rate of return
25%
required rate of return
8%
overvalued by more than 5%
17%
2-
required rate of return
risk free rate+(market return-risk free return)*beta
6+(14-6)*.5
10%
rate of return
dividend+(future price-present price) / present price
1.968+(45-41)/ 41
14.56%
Difference in rate of return
14.56-10
0.0456
Overvalued by 456 point
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