James Smith and Roberta Jones are vice-presidents of van den Berg Money Management Inc. (VDBMM), providing pension fund management services to municipalities in the New York metropolitan area. They are in the process of putting together a presentation for a new client, the NY Consortium of Cities (NYCC) and hope to convince the client that they can do a superb job of handling their investments for them. Smith is very conservative and feels that a bond strategy is best, while Jones is more aggressive and believes that a stock strategy is best considering the recent economy and how well the market has done.
Your assignment is to assist Mr. Smith and Ms. Jones in preparing the presentation for the client. You believe that a combination of both strategies might be best and would like to integrate this into the presentation as much as you can.
Now you are going to include some examples, including:
a. a stock has a beta coefficient of 1.8, the risk-free rate is 5%, and the required return on the market is 9%. What would be the required return on the stock?
b. a stock that is constant growth whose last dividend (paid yesterday) was $1.50 and whose dividend is expected to grow indefinitely at 4%:
-what would be the expected dividend stream over the next 3 years?
-what is the firm’s current stock price?
-what is the stock’s expected value one year from now?
-what are the expected dividend yield, capital gains yield, and total return during the first year?
c. assuming the same stock as in b (above) what would the expected return be if the stock was currently selling for $30.29?