HW Solutions (Chapter8)

# HW Solutions (Chapter8) - 8-3A.Value

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Unformatted text preview: 8-3A.Value (Vps)=12.100\$14.×=12.14\$=\$116.678-4A.Expected Rate of Returnps=PriceDividend= 16.42\$95.1\$= .0463, or 4.63%8-5A.(a)Expected return =PriceDividend= 40\$40.3\$= .085 = 8.5%(b)Given your 8 percent required rate of return, the stock is worth \$42.50 to you.Value=ReturnofRateRequiredDividend= 08.40.3\$= \$42.50Since the expected rate of return (8.5%) is greater than your required rate of return (8%), or since the current market price (\$40) is less than the value (\$42.50), the stock is undervalued and you should buy.8-6A.Value (Vcs)=Rate)Required(11Year in Dividend++ Rate)Required(11Year in Price+\$50=)15.1(6\$++ )15.1(P1+Rearranging and solving for P1:P1=\$50 (1.15) - \$6P1=\$51.50The stock would have to increase \$1.50 (\$51.50 - \$50) or 3 percent (\$1.50/\$50) to earn a 15% rate of return. 8-7A.(a))k(return ofrateExpectedcs=PriceMarket 1Year in Dividend+ rategrowthcs=50.22\$00.2\$+ .10cs= .1889, or 18.9%(b)Vcs =10.17.00.2\$-= \$28.57Yes, purchase the stock. The expected return is greater than your required rate of return. Also, the stock is selling for only \$22.50, while it is worth Also, the stock is selling for only \$22....
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## This homework help was uploaded on 04/21/2008 for the course FINC 332 taught by Professor Ravi during the Spring '08 term at Loyola Chicago.

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HW Solutions (Chapter8) - 8-3A.Value

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