Be sure to write the formulas used and substitute values. Show your work in detailed. Answers are 100% correct
1. Fat Builders, Inc. has an expected ROE (based upon beginning equity) of 15%. If follows a policy of paying 20% of its earnings in the form of dividends. What is Fat Builders’ sustainable growth rate?
2. Invitro Masters, Inc. has a current stock price of $40, its next year’s earnings are expected to be $4. Invitro Masters’ shareholders require a 17% rate of return. What is the present value of Invitro Masters’ growth opportunities?
3. If the required real annual rate of interest on one year Treasury Bills is 5% and the expected domestic inflation rate is 8%, based upon the exact relationship between real and nominal rates, what is the required nominal risk-free rate of interest?
4. The risk-free rate and the expected market rate of return are 5% and 14% respectively. According to the CAPM, what is the expected rate of return on Pill Popper Drug Stores if it has a beta of 1.1.
5. You invest $5,000 in security A with a beta of 0.8 and $7,000 in security B with a beta of 1.3. What is the beta of the portfolio you constructed?