FIN 3501 FIN3501 Week 5 Individual Work 2 Evaluating Stocks (Everest University)

FIN 3501 FIN3501 Week 5 Individual Work 2 Evaluating Stocks (Everest University)

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FIN 3501 Week 5 Individual Work 2 Evaluating Stocks (Everest University)

Problems 1-8:

1. You are given the following data:

Required Return = 10%

Present Dividend = $1

Growth Rate = 5%

     2. An investor requires a return of 12 percent on risky securities. A stock sells for $25, it pays a dividend of $1, and the dividends compound annually at 7 percent. Will this investor find the stock attractive? What is the maximum amount that this investor should pay for the stock?

3. A firm’s stock earns $2 per share, and the firm distributes 40 percent of its earnings as cash dividends. Its dividends grow annually at 4 percent.

4. The annual risk-free rate of return is 2 percent and the investor believes that the market will rise annually at 7 percent. If a stock has a beta coefficient of 1.5 and its current dividend is $1, what should be the value of the stock if its earnings and dividends are growing annually at 4 percent?

5. You are considering two stocks. Both pay a dividend of $1, but the beta coefficient of A is 1.5 while the beta coefficient of B is 0.7. Your required return is

6. You are offered two stocks. The beta of A is 1.4 while the beta of B is 0.8. The growth rates of earnings and dividends are 10 percent and 5 percent, respectively. The dividend yields are 5 percent and 7 percent, respectively.

8. The required return on an investment is 10 percent. You estimate that firm X’s dividends will grow as follows:


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