Financial Management Assignment-
Q1. You buy a stock that will pay a cash dividend of $1.00 next year. The company does not currently pay a dividend. The company is a growth company and you expect that, after next year, the cash dividend will grow by 4% per year in perpetuity. The discount rate is 10%. What is the present value of this stream of payments today?
Q2. Assume the same facts as above, except that you expect this company's growth period to last only a few years, after which competitors will catch up, the market will mature and become saturated with the company's product, and profits will decline to more normal levels, prohibiting the company from raising its dividend after 2019. What is the present value of this stream of payments today? Show computations to the nearest 4 decimal places.
Q3. You want to calculate the expected return on a share of stock. The beta is 1.87. The risk-free rate is 2%, and the expected return on the market is 9.5%. Use the CAPM to find the expected return for the stock.
Q4. You are using the APM to estimate the expected return on Bethlehem Steel and have derived the following estimates of the factor betas and risk premiums.
|
Factor
|
Beta
|
Risk Premium
|
|
1
|
1.2
|
2.5%
|
|
2
|
0.6
|
1.5%
|
|
3
|
1.5
|
1.0%
|
|
4
|
2.2
|
0.8%
|
|
5
|
0.5
|
1.2%
|
a. Which risk factor is the firm most exposed to? Is there any way, within the APM, to identify the risk factor?
b. If the risk-free rate is 5%, estimate the expected return on Bethlehem Steel.
c. Assume now that the beta in the CAPM for Bethlehem Steel is 1.1 and the risk premium for the market portfolio is 5%. Estimate the expected return using the CAPM.
d. Why are the expected returns different using the two models?