Assignment:
1. If investors'aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain.
2. If a company's beta were to double, would its expected return double?
3. Woidtke Manufacturing's stock currently sells for $22 a share. The stock just paid a dividend of $1.20 a share (i.e., D0 = $1.20), and the dividend is expected to grow forever at a constant rate of 10% a year. What stock price is expected 1 year from now? What is the estimated required rate of return on Woidtke's stock (assume the market is in equilibrium with the required return equal to the expected return)?
4. Suppose that the risk-free rate is 5% and that the market risk premium is 7%. What is the required return on (1) the market, (2) a stock with a beta of 1.0, and (3) a stock with a beta of 1.7? Assume that the risk-free rate is 5% and that the market risk premium is 7%.
5. A stock's return has the following distribution:
Demand for the Probability of This Rate of Return If This
Company's Products Demand OccurringDemand Occurs (%)
Weak 0.1-50%
Below average 0.2-5
Average 0.4 16
Above average 0.2 25
Strong 0.160
6. Nick's Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred sells for $50 a share. What is the stock's required rate of return (assume the market is in equilibrium with the required return equal to the expected return)?
7. Crisp Cookware's common stock is expected to pay a dividend of $3 a share at the end of this year (D1 = $3.00); its beta is 0.8; the risk-free rate is 5.2%; and the market risk premium is 6%. The dividend is expected to grow at some constant rate g, and the stock currently sells for $40 a share. Assuming the market is in equilibrium, what does the market believe will be the stock's price at the end of 3 years (i.e., what is P3 ^)?