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ISU FIN 301 - Worksheet 1

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SI: Finance 301Answers to Wednesday April 2, 20081. Capital Asset Pricing Model (CAPM) is a model that suggests that there is a Security Market Line (SML) that states that a stocks required return = the risk free return+ a risk premium that reflects the risk after diversification. How is this equation notated?2. Assume that the risk free rate is 6.5% and the expected return on the market is 14%. What is the required rate of return on a stock with a beta of 0.8?3. Assume that the risk free rate is 6% and the market risk premium is 8%. What is the expected return for the overall stock market? What is the required rate of return on a stock with a beta of 1.5%?4. You have $300,000 to invest, and you decide to put $140,000 into a stock with a beta of 1.3, $100,000 into a stock with a beta of 0.7, and the remaining $60,000 into a stock with a beta of 0.5. What is your portfolio’s beta?DIVIDEND GROWTH MODEL INFO5. What are the relevant formulas in dividend growth model?6. What are the “two biggies” of the Dividend Growth Model?7. If rRF= 8%, rm= 14%, b=1.5, what is the required rate of return on the firms stock?8. If D0=$3 and g is a constant 8%, find the expected dividend stream for the next 3 years and their PVs.9. What is the stock’s intrinsic value?10. Porter Inc. is expected to pay at $0.75 per share dividend at the end of the year. The dividend is expected to grow at a constant rate of 8% per year. The required rate of return on the stock rs is 13%. What is the stocks value per share?11. Meyer Enterprise recently paid a dividend of $1.45. It expects to have non constant growth of 25% for 3 yearsfollowed by a constant rate of 6% thereafter. The firms required return is 12%. What is the firm’s intrinsic


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