FI 311 HW 3

# FI 311 HW 3 - HW #3 Due: Tuesday, August 3, 2010, 11PM....

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HW #3 Due: Tuesday, August 3, 2010, 11PM. Please submit it to ANGEL Drop Box. Stock Valuation 1. Gamma Company’s current price is \$50 and its last dividend was \$1.2. Its required rate of return is 12%. If the dividends are expected to grow at a constant rate g. What is the value of this growth rate g? (15 points) Po = D1/ (r-g) 50/1 = 1.2/ (1.12-g) .02 = 1.12-g g = 1.10, so growth rate is 10% 2. Page 240 Extra Problem 2 (25 points)) Do – 2.15 Find P3: P3 = D4/ (r-g) .: 3.06/(.09-.05) = 76.5 D1 – 2.15 * 1.12 = 2.41 CF (worksheet) CO1 = 2.41 D2 – 2.41 * 1.10 = 2.65 CO2 = 2.65 D3 – 2.65 * 1.10 = 2.91 CO3 = 2.91 +76.5 = 79.41 @ 9% D4 – 2.91 * 1.05 = 3.06 Po = \$65.76 Risk and Return 3. Use the following information to solve these problems: (20 points) Bear Market Normal Market Bull Market Probability 0.2 0.5 0.3 Returns on Stock X -20% 18% 50%

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(-.04) + .09 + .15 a) What is the expected return on this stock? (-.04) + .09 +.15 = 20%
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## This note was uploaded on 09/23/2010 for the course FI 311 taught by Professor Booth during the Summer '06 term at Michigan State University.

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FI 311 HW 3 - HW #3 Due: Tuesday, August 3, 2010, 11PM....

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