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FIN515 FINAL VALUATION

FIN515 FINAL VALUATION

1). Church Inc. is presently enjoying relatively high growth because of a surge in the demand for its new product. Management expects earnings and dividends to grow at a rate of 40% for the next 4 years, after which competition will probably reduce the growth rate in earnings and dividends to zero, i.e., g = 0. The company’s last dividend, D0, was $1.25, its beta is 1.20, the market risk premium is 5.50%, and the risk-free rate is 3.00%. What is the current price of the common stock?
NOTE: Double click the table to see the formulas used.

2). Stocks a and b have the following data:
stock a—
beta 1.10
constant growth rate 7%

stock b–
beta .9
constant growth rate 7%

The market risk premium is 6% and the risk free rate is 6.4% Assuming the stock market is efficient and the stocks are equilibrium, which of the following statements is correct?

a) Stock b could have the higher expected return.
b) Stock b must have the higher required return.
c) Stock b’s dividend yield equals its expected dividend growth rate
d) stock a must have a higher stock price than stock b
e) stock a must have a higher dividend yield than stock b

A stock’s return is determined by the associated risk. Risk is measured by beta. From the question, you will observe that Stock A has a higher risk level (Beta). Since all the indices apart from Beta are the same for both stocks it goes to say that the higher beta would mean Stock A has higher expected return.

 

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