Market risk premium, Financial Accounting

A stock is about to pay a dividend of $2.00. The dividend is expected to grow at 15% for the next 7 years, 10% for the following 3 years, 8% for the next 2 years and then return to the long run growth rate of 5%.

(a) Suppose the stock has a CAPM beta coefficient of 1.2, the current riskless rate of interest is 1 % and the current market risk premium is 8%. What is the appropriate risk adjusted discount rate for the stock according to CAPM?

(b) What should the current value of the stock be?

(c) If the long run growth rate increased to 6%, how much would the stock price change in percentage terms?

(d) If each of the initial high growth periods had growth rates 1 percentage point higher (so the rates were 16%, 11 % and then 9%) but the long run growth rate remained at 5 %, how much would the stock price change in percentage terms?

(e) If the market risk premium changed to 10% (while the riskless rate remained at 1 %), what would happen to the appropriate risk adjusted discount rate for the stock according to CAPM?

(f) If the market risk premium changed to 10% (while the riskless rate remained at 1 %), what would happen to the percentage changes in the stock price calculated in (c) and (d).

(g) Can you explain intuitively the different relative effects on the stock price of the changes in long run versus short run growth when the market risk premium is higher?

Posted Date: 2/22/2013 4:55:33 AM | Location : United States







Related Discussions:- Market risk premium, Assignment Help, Ask Question on Market risk premium, Get Answer, Expert's Help, Market risk premium Discussions

Write discussion on Market risk premium
Your posts are moderated
Related Questions
A. Material Sampling -Analyzing Direct Material Costs You are reviewing a cost proposal, which includes an $800,200 direct material estimate. After Initial examination of the pr


Ordinary Income - One of two classes of income (other being CAPITAL GAINS) taxed under the INTERNAL REVENUE CODE. Factually, ordinary income is taxed at a higher rate than capital

A gift of residue Where property is not given by a specific legacy nor by a general legacy, it makes up the residue of the testator's estate.  If the testator fails to make a g

What are some critics by individuals and professional bodies in this joint project?

Derivation of Formulas i) Future Value of an Annuity Future value of an annuity is FVA n = A(1 + k) n -1 + A (1 + k) n - 2   + .......A (1 + k) + A     ............


The following information for the six months ended 31 December 2009 relates to the business of Mr N Morris: a) Opening cash (including bank) balance Rs 1,200 b) Productio

Joe Shareholder owns 100 shares of Peach Company stock which is currently selling for $100 per share. Peach declares a 2-1 stock split. How much are Joe's shares worth after the st

In Section we had established an association among the effective and nominal rate of interest where compounding arise n times a year that is as given: r = (1 +  k/m ) m - 1