What is the expected return of the stock

Reference no: EM133325710

Case: Jim Bob's Bait Shop is a thriving chain of fishing supply stores headquartered in Oklahoma_ It is currently unlevered, with a beta of 1 _ Each year, there is a 50% chance that the firm's earnings before interest and tax (EBIT) will be $5 million,(the "bad" state of the world) and .a 50% chance it will be $10 million (the "good state)_ Assume that every year is an independent draw (i.e., each year's EBIT is determined by these probabilities, no matter what happened during the previous year), everything is paid out to shareholders (so there is no growth over time), and everything is perpetual. The firm currently has 1 million outstanding shares. The risk-free rate is 4%, and the market risk premium is 6%. In addition, assume that the firm operates in a world where all Modigliani-Miller assumptions hold (i.e., no taxes, etc.)

Question 1: What is a fair price per share for the firm equity today?

Question 2: What is the expected return of the stock?

Question 3: What is the realized return to shareholders in the good state?

Question 4: What is the realized return to shareholders in the bad state?

Reference no: EM133325710

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