Quiz4Solution - $400 FCF 1 $75.00 Constant growth rate 5.5%...

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Quiz #4 Solutions: Module 2, Chapters 8-9 FIN 5405 J. Houston 1. CAPM Answer: b Beta 1.50 Risk-free rate 5.00% Required return on stock 14.00% Market risk premium 6.00% Required return on market 11.00% 2. Risk measures Answer: a Statement a is correct, since the coefficient of variation is equal to the standard deviation divided by the mean. The remaining statements are false. 3. Beta coefficient Answer: d 4. Risk and return Answer: a The correct answer is statement a. Stocks are riskier than bonds, with stocks in small companies being riskier than stocks in larger companies. From there, corporate bonds are riskier than government bonds, and longer-term government bonds are riskier than shorter-term ones. 5. Constant growth valuation; CAPM Answer: e D 0 $1.00 b 1.20 r RF 3.0% RP M 5.0% g 5.0% D 1 $1.05 r s 9.0% P 0 $26.25 6. Future price of a constant growth stock Answer: b Expected dividend (D 1 ) $2.00 Stock price $20.00 Years in the future 7 Required return 15% Growth rate 5.00% Expected future price $28.14
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7. Corporate valuation model Answer: a
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Unformatted text preview: $400 FCF 1 $75.00 Constant growth rate 5.5% WACC 10.0% Shares outstanding 50 Total firm value $1,666.67 Less: Value of debt & pf -$400.00 Value of equity $1,266.67 Number of shares 50 Value per share $25.33 8. Common stock concepts Answer: e Since X has the lower required return, if Y has the lower dividend yield it must have the higher expected growth rate. 9. Portfolio beta Answer: e Old funds (millions) $20.00 New funds (millions) $5.00 $25.00 Beta on existing portfolio 1.50 Risk-free rate 4.50% Market risk premium 5.50% Desired required return 13.00% Required new port. beta 1.5455 Required beta on new stocks 1.73 10. Nonconstant growth stock price Answer: e Required return 13.0% Short-run growth rate 20.0% Long-run growth rate 6% Last dividend (D ) $1.50 Year 1 2 3 4 Dividend $1.50 $1.80 $2.16 $2.59 $2.75 Terminal value 39.25 Total CFs $1.80 $2.16 $41.84 PV of CFs $1.59 $1.69 $29.00 Stock price $32.28...
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Quiz4Solution - $400 FCF 1 $75.00 Constant growth rate 5.5%...

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