Reference no: EM13380969

1. A stock paid a dividend of $2 last period and its growth rates are forecast to be g₁ = 5% for the first period and g₂ -> 4% for every period thereafter. The stock has a systematic risk of 1.5, the return on the market portfolio is 12% and the risk free rate of return is 4%. 

1. Determine the cash flows for the first three periods.
2. Determine the required rate of return for the stock using the CAPM.
3. Determine the value of this stock.
4. Suppose that the stock is trading for $15.  Would you want to buy it or sell it or are you indifferent?  What is the NPV of buying the stock?  
5. Graph the security market line and show where this stock's return falls relative to its equilibrium rate of return.  (It is not necessary to determine the current rate of return on this stock.)