Question

A.

Value and Price You plan on holding a stock for two years. The annual dividend per share is $0.77 and you believe you will be able to sell the stock in two years for $26.00. You believe this stock should pay a 8% rate of return per year. If the stock is currently priced at $22.00 the stock is __________________.

overvalued by less than 5%

overvalued by more than 5%

undervalued by less than 5%

undervalued by more than 5%

B.

Value and Returns A stock has an expected dividend yield of 4.8% a price today of $41 and an expected sale price in one year of $45. The stock has a beta of 0.5 and the expected return on the market is 14% while the risk free rate is 6%. This stock is _____________ by ________ basis points.

overvalued; 456

undervalued; 152

overvalued; 152

undervalued; 456

Answer 1

1-
required rate of return			8%
rate of return	dividend yield + capital gain yield
dividend yield	total dividend earned/ purchase price	(.77*2)/22	7%
capital gain yield	(future price-current price)/current price	(26-22)/22	18%
total rate of return			25%
required rate of return			8%
overvalued by more than 5%			17%
2-
required rate of return	risk free rate+(market return-risk free return)*beta	6+(14-6)*.5	10%
rate of return	dividend+(future price-present price) / present price	1.968+(45-41)/ 41	14.56%
Difference in rate of return		14.56-10	0.0456
Overvalued by 456 point