Assignment 1 - Economics 720 MSFA Program Fall 2010 John...

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Economics 720 Fall 2010 MSFA Program John Gonzales Assignment #1 1. You are given the following information for company X and the financial markets. • ß of stock X = 1.4 • recent dividend = $2.00 • constant growth rate = 8% • projected stock market return = 14% • yield on a 10-year treasury = 6.46% • r RF = 6.46% (a) Using the constant dividend growth model, calculate today’s stock price. (4 points). (b) Using two alternative perspectives (i.e. methods of calculation), calculate what the stock price will be at the beginning of next year. Confirm that the rate of return is equal to the dividend yield plus the capital gains yield. (c) Calculate what the stock price will be ten years from today. (d) Refer back to part (a). If new information indicates that expected inflation will now be 1.5% higher (than previously expected), what is the new stock price? Hint: calculate the new required rate of return using CAPM, then find the new stock price. What is the relationship between the original rate of return and price and the new
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Assignment 1 - Economics 720 MSFA Program Fall 2010 John...

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