EBook Problem 11-06 The risk-free rate of return is 1 percent, and the expected return on...

А B C с D E F G H I 1% 7.10% 6.10% 1 R 2 RM 3 R-R 4 Beta 5 g 6 R. 1.4 6% 9.54% R = R + beta(Rm-R:) 7 Do 8 D $3.50 $3.71 Di = D. (1+g) 9 10 a) Market price of the stock $104.80 D/(Re- g) 11 b) 12 13 Current market price of the stock = $119.00 As the current market price of the stock is greater than the intrinsic price of stock calculated in part (a), we should sell the stock i.e the stock should not be purchased. 14 15

А B с D m F G 1% 11.10% 10.10% 1 R 2 Ro 3 R-R 4 Beta 5 8 6 Re 7 Do 1.4 6% 15.14% R = R + beta(Rm-R:) $3.50 $3.71 8 D D = D. (1+g) 9 10 c) Market price of the stock $40.59 D/(Re-g) 11

A B с D LL F G 2.50% 1 Ri 2 Rm 3 R-R 11.50% 9.00% 4 Beta 1.4 R = R + beta(Rm - Rt) 5 g 6 Re 7 D. 8 D 9 6% 15.100% $3.50 $3.71 Di = D. (1+g) 10 d) Market price of the stock $40.77 D/(R-8) 11

A B C D E F G H 1.00% 7.10% 6.10% 1 RF 2 Rm 3 Rm-R, 4 Beta 5 g 6 Re 7 D. 8 D 1.1 6% 7.710% R = R + beta(Rm - R+) $3.50 $3.71 Di = D. (1+g) 9 10 e) Market price of the stock $216.96 D/(Re- g) 11

f) The increase in the return on the market increases the required return and decreases the value of the stock. The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to decrease. The decrease in the beta coefficient causes the firm to become less risky as measured by beta, which increases the value of the stock.