Question

Yahoo stock has an average return of 15 percent. Its beta is 1.5. Its standard deviation of returns is 20 percent. The average risk-free rate is 6 percent. The Sharpe index for Yahoo stock is ______

	A.	0.35
	B.	0.36
	C.	0.45
	D.	0.28
	E.	None of these are correct.

Kandle Company paid a dividend of $4.76 per share this year and plans to pay a dividend of $5 per share next year, which is expected to increase by 3 percent per year subsequently. The required rate of return is 20 percent. The value of Kandle stock, according to the dividend discount model, is $____.

	A.	39.67
	B.	41.67
	C.	33.33
	D.	31.73
	E.	None of the given answers are correct.

Answer 1

Question 1: Sharpe Index is claculate by:

Sharpe Index = (Market return of portfolio - Risk free return) / Standard deviation

= (15%-6%) / 20%

= 9%/20%

= 0.45

Therefore, sharper index is 0.45 (option C is correct)

Question 2: Dividend Discount Model formulae is,

P0 = D1 / (Ke - g)

Where, P0 is price of  the stock

D1 is the dividend of next year

ke is required return or cost of capital

and g is growth rate in dividends

So, P0 = 5 / (20% - 3%)

= 5 / 17%

= 5/0.17

= 29.41

So, the price of the stock is 29.41 according to dividend discount model (Option E is the correct answer)