Question

Jersey Jewel Mining has a beta coofficient of 1.2. Currently the risk-free rate is 2 percent...

Jersey Jewel Mining has a beta coofficient of 1.2. Currently the risk-free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $4.50 dividend that is growing at 4 percent annually.

a. What is the required return for JJM?

b. Given the required return, what is the value of the stock?

c. If the stock is selling for $100, what should you do?

d. If the beta coefficient declines to 1.0, what is the new value of the stock?

e. If the price remains $100, what course of action should you take given the valuation in d?

Homework Answers

Answer #1

a)

Required return using CAPM = risk free rate + beta ( expected return on market - risk free rate)

Required return = 0.02 + 1.2 ( 0.08 - 0.02)

Required return = 0.092 or 9.2%

b)

Dividend in year 1 = 4.5 * 1.04 = 4.68

Value of stock = D1 / K - G

Value of stock = 4.68 / 0.092 - 0.04

Value of stock = 4.68 / 0.052

Value of stock = $90

c)

If the stock is selling for $100, you should sell the stock as the stock is overvalued

d)

Required return = 0.02 + 1 ( 0.08 - 0.02)

Required return = 0.08 or 8%

Value of stock = 4.68 / 0.08 - 0.04

Value of stock = 4.68 / 0.04

Value of stock = $117

e)

You should buy the stock if the price remians $100 as the stock is undervalued.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Problem 11-05 Jersey Jewel Mining has a beta coefficient of 1.7. Currently the risk-free rate is...
Problem 11-05 Jersey Jewel Mining has a beta coefficient of 1.7. Currently the risk-free rate is 2 percent and the anticipated return on the market is 7 percent. JJM pays a $4.70 dividend that is growing at 7 percent annually. Do not round intermediate calculations. What is the required return for JJM? Round your answer to two decimal places. Given the required return, what is the value of the stock? Round your answer to the nearest cent. If the beta...
A portfolio has a beta of 1.2. The risk free rate is 5 percent and the...
A portfolio has a beta of 1.2. The risk free rate is 5 percent and the market risk premium is 6 percent. What is the required rate of return? Show work. Please no excel spreadsheets.
The risk-free rate is 5 percent. Stock A has a beta = 1.0 and Stock B...
The risk-free rate is 5 percent. Stock A has a beta = 1.0 and Stock B has a beta = 1.4. Stock A has a required return of 11 percent. What is Stock B’s required return? a. 12.4% b. 13.4% c. 14.4% d. 15.4% e. 16.4%
Suppose the market return is 8%, the risk-free rate is 1% and the beta for a...
Suppose the market return is 8%, the risk-free rate is 1% and the beta for a given stock is 1.2. Answer the following questions based on this information: What is the required return for this stock? If the beta increases by 50% (but risk-free rate remains 1%), what will be the new required return for the stock? What is the percentage-wise change in required return compared to your answer to A) above? If the market return increases by 50% (but...
Blossom Industries common stock has a beta of 1.2. If the market risk-free rate is 4.6...
Blossom Industries common stock has a beta of 1.2. If the market risk-free rate is 4.6 percent and the expected return on the market is 9.1 percent, what is Blossom’s cost of common stock? (Round answer to 1 decimal places, e.g. 15.2%.) Cost of common stock %
The risk-free rate is 7%; Stock A has a beta of 2.0; Stock B has a...
The risk-free rate is 7%; Stock A has a beta of 2.0; Stock B has a beta of 1.0; and the market risk premium, rM – rRF, is positive. Which of the following statements is CORRECT? a. Stock A's required rate of return is twice that of Stock B. b. If Stock B's required return is 11%, then the market risk premium is 5%. c. If the risk-free rate remains constant but the market risk premium increases, Stock A's required...
What is the expected risk-free rate of return if Asset X, with a beta of 1.2,...
What is the expected risk-free rate of return if Asset X, with a beta of 1.2, has an expected return of 17 percent, and the expected market return is 15 percent? A. 4% B. 6% C. 5% D. 4.5%
Question 5 Aset P has a beta of 1.2. The risk-free rate of return is 2%,...
Question 5 Aset P has a beta of 1.2. The risk-free rate of return is 2%, while the return on the S&P 500 is 8%. Asset P's required rate of return is: Question 6 A corporate bond is sold for $1,000 (par value) with a 5% coupon. Shortly thereafter interest rates in the economy (the nominal rate of interest) increases to 9% due to inflation worries. Given this scenario (all other things being equal), which of the following bond valuations...
An investment has a beta of 1.0. The risk free rate is 2% and current market...
An investment has a beta of 1.0. The risk free rate is 2% and current market return is 8%? What is the required return? So, if you were able to guarantee a return of 7% on this investment, should you go forward with the investment? What is the required return if beta is .8 instead? So, if you were able to guarantee a return of 7% on this investment, should you go forward with the investment?
You estimate the beta of a preferred stock you’re considering buying at 1.2. The risk free...
You estimate the beta of a preferred stock you’re considering buying at 1.2. The risk free rate is 3% currently and the market is expected to return investors 8% (over the long run, maybe not tomorrow!). The preferred dividend is $140 per year per share. If it turns out that the beta of the stock is 1.0, what is likely to happen to the value of your investment? By how much, exactly?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT