STUDY BUSI 408 Questions & Answers
Assume that large-company stocks had Real return = (1..030) - 1 = .0883, or 8.83 percent
an average rate of return of 12.1 percent
over the past 88 years while T-bills
returned an average of 3.5 percent and
inflation averaged 3.0 percent. Given this,
the real return on large-company stocks
was:
Ben & Terry's has an expected return of E(R)=.132=Rf+1.08(.124-Rf)
13.2 percent and a beta of 1.08. The Rf=.0240, or 2.40percent
expected return on the market is 12.4
percent. What is the risk-free rate?
Blue Bell stock is expected to return 8.4 Expected return = (.06 ×.084) + (.92 ×.089) + (.02 ×.092) = .0888
percent in a boom, 8.9 percent in a Variance = .06(.084-.0888)^2 + .92(.089 -.0888)^2 + .02(.092-.0888)^2 = .0000
normal economy, and 9.2 percent in a Standard deviation = .000002.5 = .0013, or .13 percent
recession. The probabilities of a boom,
normal economy, and a recession are 6
percent, 92 percent, and 2 percent,
respectively. What is the standard
deviation of the returns on this stock?
, STUDY BUSI 408 Questions & Answers
Burkhardt Corp. pays a constant $14.90 The price of any financial instrument is the present value of the future cash
dividend on its stock. The company will The future dividends of this stock are an annuity for six years, so the price o
maintain this dividend for the next six stock is the present value of an annuity, which will be:
years and will then cease paying
dividends forever. P0 = $14.90(PVIFA10%,6)
P0 = $64.89
If the required return on this stock is 10
percent, what is the current share price?
(
, STUDY BUSI 408 Questions & Answers
With nonconstant dividends, we find the price of the stock when the divide
level off at a constant growth rate, and then find the present value of the fu
stock price, plus the present value of all dividends during the nonconstant
Burton Corp. is growing quickly. growth period. The stock begins constant growth after the third dividend is
Dividends are expected to grow at a rate so we can find the price of the stock in Year 3, when the constant dividend
of 28 percent for the next three years, growth begins as:
with the growth rate falling off to a
constant 7.9 percent thereafter. The P3 = D3(1 + g2) / (R - g2)
required return is 16 percent and the P3 = D0(1 + g1)^3(1 + g2) / (R - g2)
company just paid a dividend of $3.70. P3 = $3.70(1.28)^3(1.079) / (.16 - .079)
P3 = $103.36
What are the dividends each year for the
next four years? The price of the stock today is the present value of the first three dividends
What is the share price in three years? the present value of the Year 3 stock price. The price of the stock today wil
What is the current share price?
P0 = $3.70(1.28) / 1.16 + $3.70(1.28)^.16^2 + $3.70(1.28)^.16^3 + $103.36
1.16^3
P0 = $79.78
, STUDY BUSI 408 Questions & Answers
With nonconstant dividends, we find the price of the stock when the divide
level off at a constant growth rate, and then find the present value of the fu
stock price, plus the present value of all dividends during the nonconstant
growth period. The stock begins constant growth after the third dividend is
Burton Corp. is growing quickly. so we can find the price of the stock in Year 3, when the constant dividend
Dividends are expected to grow at a rate growth begins as:
of 29 percent for the next three years,
with the growth rate falling off to a P3 = D3(1 + g2) / (R - g2)
constant 6.3 percent thereafter. P3 = D0(1 + g1)^3(1 + g2) / (R - g2)
P3 = $2.90(1.29)^3(1.063) / (.15 - .063)
If the required return is 15 percent and P3 = $76.06
the company just paid a dividend of
$2.90, what is the current share price? The price of the stock today is the present value of the first three dividends
the present value of the Year 3 stock price. The price of the stock today wil
P0 = $2.90(1.29) / 1.15 + $2.90(1.29)^.15^2 + $2.90(1.29)^.15^3 + $76.06 /
P0 = $61.01
Assume that large-company stocks had Real return = (1..030) - 1 = .0883, or 8.83 percent
an average rate of return of 12.1 percent
over the past 88 years while T-bills
returned an average of 3.5 percent and
inflation averaged 3.0 percent. Given this,
the real return on large-company stocks
was:
Ben & Terry's has an expected return of E(R)=.132=Rf+1.08(.124-Rf)
13.2 percent and a beta of 1.08. The Rf=.0240, or 2.40percent
expected return on the market is 12.4
percent. What is the risk-free rate?
Blue Bell stock is expected to return 8.4 Expected return = (.06 ×.084) + (.92 ×.089) + (.02 ×.092) = .0888
percent in a boom, 8.9 percent in a Variance = .06(.084-.0888)^2 + .92(.089 -.0888)^2 + .02(.092-.0888)^2 = .0000
normal economy, and 9.2 percent in a Standard deviation = .000002.5 = .0013, or .13 percent
recession. The probabilities of a boom,
normal economy, and a recession are 6
percent, 92 percent, and 2 percent,
respectively. What is the standard
deviation of the returns on this stock?
, STUDY BUSI 408 Questions & Answers
Burkhardt Corp. pays a constant $14.90 The price of any financial instrument is the present value of the future cash
dividend on its stock. The company will The future dividends of this stock are an annuity for six years, so the price o
maintain this dividend for the next six stock is the present value of an annuity, which will be:
years and will then cease paying
dividends forever. P0 = $14.90(PVIFA10%,6)
P0 = $64.89
If the required return on this stock is 10
percent, what is the current share price?
(
, STUDY BUSI 408 Questions & Answers
With nonconstant dividends, we find the price of the stock when the divide
level off at a constant growth rate, and then find the present value of the fu
stock price, plus the present value of all dividends during the nonconstant
Burton Corp. is growing quickly. growth period. The stock begins constant growth after the third dividend is
Dividends are expected to grow at a rate so we can find the price of the stock in Year 3, when the constant dividend
of 28 percent for the next three years, growth begins as:
with the growth rate falling off to a
constant 7.9 percent thereafter. The P3 = D3(1 + g2) / (R - g2)
required return is 16 percent and the P3 = D0(1 + g1)^3(1 + g2) / (R - g2)
company just paid a dividend of $3.70. P3 = $3.70(1.28)^3(1.079) / (.16 - .079)
P3 = $103.36
What are the dividends each year for the
next four years? The price of the stock today is the present value of the first three dividends
What is the share price in three years? the present value of the Year 3 stock price. The price of the stock today wil
What is the current share price?
P0 = $3.70(1.28) / 1.16 + $3.70(1.28)^.16^2 + $3.70(1.28)^.16^3 + $103.36
1.16^3
P0 = $79.78
, STUDY BUSI 408 Questions & Answers
With nonconstant dividends, we find the price of the stock when the divide
level off at a constant growth rate, and then find the present value of the fu
stock price, plus the present value of all dividends during the nonconstant
growth period. The stock begins constant growth after the third dividend is
Burton Corp. is growing quickly. so we can find the price of the stock in Year 3, when the constant dividend
Dividends are expected to grow at a rate growth begins as:
of 29 percent for the next three years,
with the growth rate falling off to a P3 = D3(1 + g2) / (R - g2)
constant 6.3 percent thereafter. P3 = D0(1 + g1)^3(1 + g2) / (R - g2)
P3 = $2.90(1.29)^3(1.063) / (.15 - .063)
If the required return is 15 percent and P3 = $76.06
the company just paid a dividend of
$2.90, what is the current share price? The price of the stock today is the present value of the first three dividends
the present value of the Year 3 stock price. The price of the stock today wil
P0 = $2.90(1.29) / 1.15 + $2.90(1.29)^.15^2 + $2.90(1.29)^.15^3 + $76.06 /
P0 = $61.01
