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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.
- Spring '08