Stock Seven

Stock Seven just paid a dividend of $5. Dividends are expected to grow at 0% for 20 years and thereafter growth is expect to rise to 2% to infinity. What is the current share price if the cost of capital is 10%?

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SML Questions

Q1. You are given the following information: (a)A stock with a beta of 0 has an expected return of 6% (b)A portfolio made up of 50% invested at the risk free rate and 50% invested in the market portfolio has an expected return of 9%. What is the expected return of the market portfolio? Q2: Securities I and J lie on the security market line: I: Expected return 14%, Beta 1 J: Expected return 18%, Beta 1.5 Assume the CAPM holds. I.What is the risk free rate of return and the risk premium on the market portfolio? II.Security K has an expected return of 24% and a Beta of 1.8. What is likely to happen to the return and price of security K? Explain your answer.

DIvidend Discount question

Vornado is a company that has patent rights for a new mobile phone technology that is expected to enable it to generate growth in earnings of 20% for the next 3 years. After that (from the start of year 4) the company expects to see earnings growth drop to a constant rate of 5%.

Assuming that the company pays out 60% of earnings as dividends and that the last dividend payment made by the company was $2.20, calculate an estimate of the current price of Vornado. Assume the required return on equity is 8%.