What will be investors expectation of the price of the stock


Question 1.

(a) A Stock with a beta of .75 now sells for $50. Investors expect the stock to pay a year- end dividend of $2.00. The T-Bill rate is 4%, and the market risk premium is 7%. If the stock is fairly priced, what will be investors expectation of the price of the stock at the end of the year?

(b) Suppose investors believe that the above stock will sell for $52 at the year-end. Is the stock a good or bad buy? What will investors do? At what point will the stock reach an “equilibrium” at which it again is perceived as fairly priced?

Question 2. Jet red airlines hired you as a consultant to value its equity because it plans to go public soon. The company will maintain its 30% debt and that at this capital structure, debt holders will demand a return of 6% and stockholders will require 11%. Next year’s operating cash flow will be $68 million and that investment expenditures will be $30 million. Thereafter, operating cash flows and investment expenditures are forecast to grow by 4% a year. The company’s tax rate is 40%

a. What is the total value of Red airlines?

b. What is the value of the company’s equity?

Question 3.

(a) Sony exports its products to the United States and prices its products in yen. Suppose the yen moves from JPY85.66=USD1 to JPY82.00=USD1. What currency risk does Sony face? How can it reduce its exposure?

(b) In 1983, JPY245=USD1. In 2008 the yen was JPY 103.5 =USD1. If a Japanese car was $9,000 in 1983 and, its price changes were in direct relation to exchange rates, what would the dollar price of the car in 2008 if the price changes with the exchange rates.?

(c) Under the above situation, how would an American importer of Japanese cars, covers the exchange rate risk if the American importer is billed in yen?

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Finance Basics: What will be investors expectation of the price of the stock
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