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VALUATION OF A CONSTANT GROWTH STOCK A stock is expected to pay a dividend of $0.50 at the end of the year (that is, D1= 0.50), and it should continue to grow at a constant rate of 7% a year. If its required return is 12%, what is the stock’s expected price 4 years from today?
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BETA AND REQUIRED RATE OF RETURN A stock has a required return of 11%, the risk-free rate is 7%, and the market risk premium is 4%.
a. What is the stock’s beta?
b. If the market risk premium increased to 6%, what would happen to the stock’s required rate of return? Assume that the risk-free rate and the beta remain unchanged.
CAPM AND REQUIRED RETURN Calculate the required rate of return for Manning Enterprises assuming that investors expect a 3.5% rate of inflation in the future. The real risk-free rate is 2.5% (assume there is no maturity risk premium), and the market risk premium is 6.5%. Manning has a beta of 1.7.
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CAPITAL BUDGETING CRITERIA: MUTUALLY EXCLUSIVE PROJECTS Project S costs $15,000, and its expected cash flows would be $4,500 per year for 5 years. Mutually exclusive Project L costs $37,500, and its expected cash flows would be $11,000 per year for 5 years. If both projects have a WACC of 14%, which project would you recommend? Explain.
