Calculate actual returns using the dividend discount model, Financial Management

You've just won a huge $100 million lottery.  You've decided to invest your winnings in the following way:  $30 million in real estate,  $30 million in  corporate bonds and $40 million in equities.  For the equities you've identified 4 possible investments (A, B, C & D) that interest you.  Based on your level of tolerance for risk,  your equity portfolio needs to have an average beta that is 30% higher than the beta of the market portfolio.

(a) You  invest $5 million  in  investment A which has a beta of 0.6 and $8 million  in B which has a beta of 0.9.   If C has a beta of 1.7 and D  is assumed  to have no risk, then how much would you invest in C & D?

(b) Assume that equities A, B & C are priced correctly.  If the rate of return on D is 3% and the average market risk premium is 4%, what is the rate of return on each of A, B & C?

(c) You've also identified 3 other equities (X, Y & Z).  Calculate their actual returns using the dividend discount model and compare this to their expected returns using CAPM. Which of the investments is (are) correctly priced, underpriced or overpriced? Which one(s) would lie on the SML (Security Market Line), above the SML or below the SML.

807_Calculate actual returns using the dividend discount model.png

Posted Date: 2/20/2013 3:07:58 AM | Location : United States







Related Discussions:- Calculate actual returns using the dividend discount model, Assignment Help, Ask Question on Calculate actual returns using the dividend discount model, Get Answer, Expert's Help, Calculate actual returns using the dividend discount model Discussions

Write discussion on Calculate actual returns using the dividend discount model
Your posts are moderated
Related Questions
Determine the factors of financial risk by giving example W. T. L. Company's cost of long-term debt two years ago was 8 percent.  This 8 percent was found to represent a 4- per

ARROW as an FSA's risk based approach to regulation ARROW stands for Advanced, Risk-Responsive Operating Framework. In January 2000, FSA set out a proposed approach to regulati

Determine the term- Time Value of Money If an individual behaves rationally, then he wouldn't equate money in hand today with same value a year from now. As a matter of fact, h

What are financial markets? Why do they exist? Ans: Financial markets are in which financial securities are bought and sold.  They be present primarily to bring deficit economi


The purchase price is expected to be in the region of £30m - £40m now (year 0 ?? 2003) and further cash flow effects might include: ?? Annual cash inflows from New You ?? in a rang

should a company pursue price hike or focus on increased sales

Explain the terms- Stock and  Share Stock Ownership of a company represented by shares that are a claim on the company's earnings and assets. Share Unit of equity

Q. Forms of Bank Finance? A firm can draw funds from a bank within the maximum credit limit sanctioned. It can draw funds in the following forms: 1) Overdraft 2) Cash Cre

Joe and Sam each invested $20,000 in the stock market. Joe's investment increased in value by 5% per year for 10 years. Sam's investment decreased in value by 5% for 5 years and th