Question: 1. Adam's Inc.'s outstanding common stock is currently selling in the market for $26. Dividends of $1.95 per share were paid last year, and the company expects annual growth of 5%.
(a) What is the value of the stock to you, given a 12% required rate of return?
(b) Determine the expected rate of return for the stock.
(c) Should you purchase this stock? Why?
2. A Stock has a required return of 11%, the risk- free is 7%, and the market risk premium is 4%.
a. What is the stock's beta?
b. If the market risk premium increased to 6%, what would happen to the stock's required rate of return? What would it be? Assume that the risk free rate and the beta remain unchanged.
c. If investors' aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that of a low-beta stock? Explain.
3. ATN 14 year, $1000 par value bonds pay 9% interest annually. The market price of the bonds is $1,100 and your required rate of return is 10%.
a) Calculate the bond's expected rate of return or yield to maturity.
b) Determine the value of the bond to you, given your required rate of return.
c) Should you purchase the bond? Explain in detail your reasons