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
I am an AAT student studying lvl 3 AAT at college. I wish to learn how to complete self assessment end of year tax return forms for other people. That is because I have already bee

Can you show me how to solve these problems? PLEASE!!! I can't figure out how to solve these. :-( 1.Briarcrest Condiments is a spice-making firm. Recently, it developed a new

The intestate leaves no spouse and no children The net estate devolves as follows: to his Father; or if dead Mother; or if dead Brothers and sisters, and any child o

Income statement2013 2012 2011 Net revenue 5,075,390.. 4,763,180.. 4,158,507 Cost of goods 1,377,242.. 1,297,102.. 1,134,966.. Gross profit 3,698,148.. 3,466,078.. 3,023,541 Total

This assignment requires you to pretend you have $10,000 to invest for 4 weeks.  You are to "invest" this money in stocks or mutual funds and to track your investments on a weekly

Help making t-Accounts

Q. Flexibility in Debt finance? Debt finance is more elastic than equity in that various amounts can be borrowed at a fixed or floating interest rate and for a range of maturit

Evaluate the importance of leverage in financial management of a small scale company

Construct the Market Value Balance Sheet XYZ, Inc., another company founded by Larry Davidson in 2005, is currently entirely equity financed. That means the company carries no

AMALGAMATIONS Two sole traders and a partnership,two or more partnerships or a sole trader and other partnerships may combine or join together to forma a single partnership. The