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A stock's returns have a correlation coefficient with the overall market of 40%. Its standard deviation is 30%.
The market index has a standard deviation of 15%. Calculate the stock’s beta coefficient. (3)
0.80 P= 40% SD 30% MSD= 15% Beta=

Using the equation for the Security Market Line, calculate the required return for a stock where the risk-free rate is
the required return on the market is 8% (so the market risk premium is 5%), and the beta is 1.20. (4)
9.00% r(rf)= 3% r(m)= 8% Beta= 1.2 CAPM=
^ ^
r i  rrf  [r m  rrf ]betai
 Score 64
Percent 100%
r partial credit.
o calculations.

ard deviation is 30%.

 i ,m i
pxSD/MSD
m
k where the risk-free rate is 3%,
ta is 1.20. (4)
9.00% 0
^ ^
r i  rrf  [r m  rrf ]betai
A company just paid an annual dividend of $1.00 (D0). Growth in dividends is expected to be constant at 4% indefinitely. The r
on the stock is 8%. Using the dividend discount model, what is the price of the stock today? (3)

A company will pay an annual dividend of $2.00 next year (D1). Growth in dividends is expected to be constant at 4% indefinit
currently priced at $50.00. What is the required return? (3)

The dividend will be $1.00 next year (D1), $1.06 year 2 (D2), and will grow 4% in year 3 and every year thereafter (constant gro
The cost of equity is 10%. Calculate the stock price today. (10)
 D(o)= 1
D0 (1  g )
P0 
rs  g
g= 4%
$26.00 r(s)= 8%
P(o)= 26.00

8.00% D(1)= 2
P(o)= 50
𝑟𝑠=
𝐷1/𝑃0 + g
g= 0.04
$16.97 r(s)= 8.00% Required return

Year Growth Dividend

0
1 1.00
2 1.06
3 4% 1.10

1. Use the dividend at time 3 to find the stock price at time 2. Use constant growth dividend D3 to find P2 (presen
Recall that pv resides 1 period before the first cash flow.

P(2)= D(3)/r(=2.29/(0.1-0.04)

P2 = $ 18.37

2. Find the value today of the projected price at year 2 at the 10% discount rate.

PV of period 2 stock price today = =P(2)/(1+r(s)^2 =18.37/(1.10)^2

$15.18 or use financial function: $15.18

3. Add the present value of the 2 dividends received during the non-constant growth period. Discount D1, D2 an
Year Dividend Present Value @10%
0 0.00 Formulas
PV Function NPV
1 1.00 0.91 0.91
2 1.06 0.88 0.88

+Total PV of dividends: 1.79 1.79

+PV of period 4 stock price today = 15.18 15.18
=Stock price today $16.97 $16.97 $16.97 Stock price today
 NO

WORK

IN

GREEN

CELLS

vidend D3 to find P2 (present value 1 period before cash flow)

period. Discount D1, D2 and P2, to find price P0 (today)

1 2 3 growth = 4% ∞
1.00 1.06 1.10

0.91
0.88
 15.18 15.18
Stock price today $16.97
15 points
Calculate the WACC
Cost of Equity
CAPM Information: CAPM
10 million shares 10
Stock price $60 per share $60.00 Market Capitalization $M
Beta = 1.40 1.4
Required stock market return = 9% (Rm) 9% Cost of Debt
10-year Treasury YTM = 4% (Rrf) 4%
Issue 1
Debt Information: Annualize
Only 1 bond outstanding
Issue 1:
Total market value $400 million $400.00 Total Capital
Current price = $1,071.06 $1,071.06
Coupon rate = 7%, semiannual coupons 7%
10 years to maturity 10 WACC

Security Market Line from Capit

Tax rate = 40% 40% (CAPM):

^ ^
r i  rrf (1-T)
WACC = (D/V)r
[ r m+  rrf
(S/V)r
d

D = Target Debt Market Value

S = Target Stock Market Value
T = tax rate
V = Enterprise Market Value =
 Percentage Value $M
11.00%

$600.00

YTM Value $M

3.02%
6.04% $ 400

$1,000.0

8.05%
Security Market Line from Capital Asset Pricing Model 0
(CAPM):

^ ^
r i  rrf (1-T)
WACC = (D/V)r
[ r m+  rrf ]betai
(S/V)r
d s

D = Target Debt Market Value

S = Target Stock Market Value
T = tax rate
V = Enterprise Market Value = D + S
Year Cash Flow4 points each
0 $ (100,000) Cumulative CF
1 $ 20,000 $ (80,000) =B2+B3=Cash Flow 0 +Cash Flow 1
2 $ 30,000 $ (50,000) =Cumulative cash Flow 1 +Cash Flow 2
3 $ 40,000 $ (10,000) breakeven between years 3 and 4, when the cumulative cash flow tur
4 $ 40,000 $ 30,000 0.25 So we need to use ending cumulative cash flow of Year 3 and actual c
Cost of Capital = 9% 9%
Calculate:
NPV 2,823.37 =NPV(B8,B3:B7)+B2
Payback period 3.25
IRR 10.14% =IRR(B2:B7)
0
mulative cash flow turns positive in Year 4,
of Year 3 and actual cash flow of Year 4 to arrive at the fraction part
Terminology 2 points each Place the letter corresponding to the term in the yellow cell.
1 Beta coeffficient A Use the letter
2 Risk-free rate of interest H
3 Security market line D
4 Internal rate of return G
5 Market risk premium C
6 Systematic risk E
7 Net present value F
0

A The amount of systematic risk present in a particular security, relative to the systematic risk present in the broad m
B Offers the highest return at any given level of risk
C The slope of the security market line
D Representation of the linear relationship between stock returns and their risk measure
E Risk that affects markets broadly
F Measure of dollar value-added to investors on a project, after covering their cost of financing and the dollars invest
G The discount rate that sets the present value of future cash flows on an investment equal to the investment amoun
H The intercept of the security market line
tic risk present in the broad market

nancing and the dollars invested

qual to the investment amount