Sports Authority Inc. has just paid a cash dividend, D0, of $2.00 per share. Investors require a return, k, of 12.0% from investments such as this. Use this information to answer the next two questions.
1. If the dividend is expected to grow at a constant rate, g, of 4.0% per year, then find the current value, P0, of a share of stock using the dividend discount model (DDM). Show your work. Hint: P0 = D1/(k-g) and
D1 = D0 × (1+g). Check figure: P0 = $26.00.
2. Estimate what P5, the value a share of stock five years from now, will be. Show your work.
Hint: P5 = P0 × (1+g)5.
3. Assume that the risk-free rate is 4.5%, the market return is 10.5%, and the return on stock W is 12.5%. Using the CAPM, determine the beta coefficient for stock W. Show your work.
4. An investment fund consists of four stocks with the following investments and betas:
Stock A: $400,000 +1.50
Stock B: $600,000 -0.50
Stock C: $1,000,000 +1.25
Stock D: $2,000,000 +0.75
Calculate the portfolio beta for this investment fund. Show your work. Check figure: Portfolio beta = 0.7625.