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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 10year 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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 Spring '10
 Tsuash
 Economics

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