Risk and stock valuation calculations
Risk and stock valuation calculations
SOUTHERN NEW HAMPSHIRE UNIVERSITY
Term 17TW1
FIN550:Homework #1 (Risk & Stock Valuation) INSTRUCTOR: Dr. Gary P. Tripp
INSTRUCTIONS: Please answer each of the seven (7) questions below, which covers topics from Chapter 6 (#1 – #3) and Chapter 7 (#4 – #7). If you use Excel to calculate your answers (which is fine by the way), be sure to present your answers to each question on a separate page and hand in your Excel spreadsheet. In other words, I would like to receive your answers in a printed Word file as opposed to a spreadsheet format which often does not format properly as a report which can be easily read. The due date for this homework assignment is next Monday, September 25, 2017. Next week in class we will finish Chapter 7 and also Chapter 5 (Bond Valuation). Your Milestone #2 (which are sections #II and #III) will be due in Module 5 which is Monday, October 2, 2017. Good luck!
1. Using the following information for BuxleyInc.’s stock, calculate their expected return (r), the standard deviation (σ), and the coefficient of variation (CV).
State Probability Return
Boom 20% 40%
Normal 50% 15%
Recession 30% -20%
2. Suppose you hold the following portfolio:
Stock Investment Beta
A $150,000 1.40
B 50,000 0.80
C 100,000 1.00
D 75,000 1.20
Total $375,000
What is your portfolio’s beta based on the data above?
3. Company A has a beta of 0.70, while Company B’s beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. What is the difference between A’s and B’s required rates of return? (Hint: First find the market risk premium, then find the required returns on the stocks.)
4. A stock is expected to pay a dividend of $0.75 at the end of the year. The required rate of return is rs = 10.5%, and the expected constant growth rate is g = 6.4%. What is the stock’s current price?
5. If D0 = $2.25, g (which is constant) = 3.5%, and P0 = $50, what is the stock’s expected dividend yield for the coming year?
6. If D1 = $1.25, g (which is constant) = 5.5%, and P0 = $44, what is the stock’s expected total return for the coming year?
7. A company has an outstanding issue of perpetual preferred stock with an annual dividend of $7.50 per share. If the required return on this preferred stock is 6.5%, at what price should the preferred stock sell (Hint: Recall that a preferred stock behaves like a zero-growth stock)?
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