Using capm as benchmark-calculate alpha for each stock

Assignment Help Financial Management
Reference no: EM131972506

Stocks A and B are currently selling for $75 and $42, respectively. Assume the expected return and the standard deviation of the market portfolio is 10% and 12%, respectively and the risk-free rate is 0.5%. The standard deviation for A and B are 18% and 14%, respectively; and the correlation of each stock with the market portfolio is 0.35 and 0.65. Suppose that you estimate a year-end target price of $78 and $46 for these stocks (NO DIVIDENDS ARE EXPECTED). Using CAPM as a benchmark, calculate the alpha for each stock and state whether the stocks are underpriced or overpriced.

Reference no: EM131972506

Questions Cloud

What is company weighted average cost of capital : The company pays a tax rate of 30%. What is the company’s weighted average cost of capital (WACC)?
Explain which order type provides liquidity : Define liquidity and explain which order type (market or limit) provides liquidity.
Research how fasb and ifrs treat changes : Research how FASB and IFRS treat changes in accounting estimates and errors. What do they have in common? What is different?
Calculate the price of the two-year bonds : Calculate (showing your work) the price of the following 2-year bonds when the yields on similar assets are 4 percent and the bonds have $100 face values
Using capm as benchmark-calculate alpha for each stock : Using CAPM as a benchmark, calculate the alpha for each stock and state whether the stocks are under priced or overpriced.
What is the present value of the stock : A company intends to pay dividends of $0.40, $0.60, $0.75, and $1.00 per share for the coming four years, what is the present value of the stock?
Percentage change in price of bond sam and bond dave : If interest rates suddenly rise by 2 percent, what is the percentage change in the price of Bond Sam and Bond Dave?
Calculate the expected price of stock : How do you calculate the expected price of a stock in 4 years if the preferred dividend per share is $9, the Beta is 0.85, the Risk Free Rate is 5%
Differences between intrinsic and market values : You can reference any method of valuation models in offering thoughts on why there might be differences between intrinsic and market values.

Reviews

Write a Review

Financial Management Questions & Answers

  What level of expected cash flows does make sense to abandon

Allied Products, Inc., is considering a new product launch. The firm expects to have annual operating cash flow of $6.9 million for the next 8 years. Allied Products uses a discount rate of 11 percent for new product launches. The initial investment ..

  What is the company current price

The company's beta is 1.35, the market risk premium is 8% and the risk-free rate is 3%. what is the company's current price?

  Different account that pays compounded semi annually

Debra deposited $1000 five years ago in an account that paid 4% annually. But three years ago she moved her money to a different account that pays 5% compounded semi annually. How much does she have in her account now?

  Minimum acceptable return on investment

Company A owns a patent with 15 years of remaining life. If Company A considers 10% per year to be its minimum acceptable return on investment,

  What is the npv of the new production line

The new line would cost $1 million, have a five-year life, and be depreciated using MACRS over three years. What is the NPV of the new production line?

  Sole owner of all-equity firm-debt is secured by the firm

Suppose that you are the sole owner of an all-equity firm, the assets of which are worth $500,000. The ROA is 15% per year paid as a dividend to you. If you have the firm issue $100,000 of debt at 6%, the interest expense will be paid by the firm out..

  What is the maximum price you will pay for bond

What is the maximum price you will pay for a bond with a face value of $1000 and a coupon rate of 14%, paid annually, if you want a yield of 10%. Assume that bond will mature in 10 years and the first payment will be received in one year

  Pay out of pocket for repairs on your home

How much will you have to pay out of pocket for repairs on your home if you have your home insured for $100,000,

  What is cost of equity raised by selling new common stock

Trahan Lumber Company hired you to help estimate its cost of common equity. You obtained the following data: D1 = $1.25; P0 = $27.50; g = 5.00% (constant); and F = 6.00%. What is the cost of equity raised by selling new common stock?

  Statement of cash flows for projections

Prepare a statement of cash flows for 2013 and the 2014 projections. What did you learn from these statements?

  Evaluate the proposed acquisition of a new special

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $60,000. The truck falls into the MACRS 3-year class, and it will be sold after three years for $20,900. The firm’s marginal ..

  Relationship of required rates and prices of preferred stock

Explicate the relationship of required rates and prices of preferred stocks.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd