Market risk premium, Financial Accounting

Assignment Help:

A stock is about to pay a dividend of $2.00. The dividend is expected to grow at 15% for the next 7 years, 10% for the following 3 years, 8% for the next 2 years and then return to the long run growth rate of 5%.

(a) Suppose the stock has a CAPM beta coefficient of 1.2, the current riskless rate of interest is 1 % and the current market risk premium is 8%. What is the appropriate risk adjusted discount rate for the stock according to CAPM?

(b) What should the current value of the stock be?

(c) If the long run growth rate increased to 6%, how much would the stock price change in percentage terms?

(d) If each of the initial high growth periods had growth rates 1 percentage point higher (so the rates were 16%, 11 % and then 9%) but the long run growth rate remained at 5 %, how much would the stock price change in percentage terms?

(e) If the market risk premium changed to 10% (while the riskless rate remained at 1 %), what would happen to the appropriate risk adjusted discount rate for the stock according to CAPM?

(f) If the market risk premium changed to 10% (while the riskless rate remained at 1 %), what would happen to the percentage changes in the stock price calculated in (c) and (d).

(g) Can you explain intuitively the different relative effects on the stock price of the changes in long run versus short run growth when the market risk premium is higher?


Related Discussions:- Market risk premium

Irs, I am looking for the solutiotns to this problem. Using the informat...

I am looking for the solutiotns to this problem. Using the information provided below, complete Aspen Ridge limited partnership%u2019s page 1 of Form 1065; complete Schedule K o

Accounts, the salaries paid in 2004 is rs. 500000 salaries outstanding is r...

the salaries paid in 2004 is rs. 500000 salaries outstanding is rs.20000 salaries paid in advance for 2004 is rs 30000 what is the actual salary expenditure for 2004?

Discount rate to the estimated npv of the investment, Q. Discount rate to t...

Q. Discount rate to the estimated NPV of the investment? There is no necessity to round the solution up to the nearest whole percentage. NPV approximate may be made using the e

Profitability index of a project, Using the profitability index, which of t...

Using the profitability index, which of the following projects should be accepted? Project M:  NPV = $60,000     NINV =    $200,000 Project N:  NPV = $10,000     NINV =     $

What is the number of shares, Terry Corporation had 300,000 shares of commo...

Terry Corporation had 300,000 shares of common stock outstanding at December 31, 2010. In addition, it had 90,000 stock options outstanding, which had been granted to certain execu

Calculate the expected present value, Problem1 Derive from first princi...

Problem1 Derive from first principles an expression for the variance of the benefits payable under an endowment assurance with benefits payable at the end of the year of death.

Calculate the beta of assets , An investor holds a bullish view for the equ...

An investor holds a bullish view for the equity market over the next twelve months and wishes to recalibrate his portfolio to reflect this view. The investor's portfolio consists o

Accounting concepts, What is implication of applying accounting concepts wr...

What is implication of applying accounting concepts wrongly.

What is capitalized interest, Q. What is Capitalized Interest? Capitali...

Q. What is Capitalized Interest? Capitalized Interest - INTEREST cost incurred during time required to bring an ASSET tothe condition and location for its intended use and incl

Write Your Message!

Captcha
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