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
The following accounts and balances have been taken from the general ledger trial balance of Daiton Repairs Limited as at October 31, 19×2, after its first year of operation. Adjus

How does ordinary shares and preference shares included in the account

Consequences of adjudication The consequences of the making of the adjudication order are: 1. The order must be advertised in the gazette and a local paper; 2. The ownershi

when youre using accounting software why would you use hot keys and shortcuts a.to quickly access commands b.to input data for you c.to start the program d.to write checks

LCI Cable Company grants 1.4 million performance stock options to key executives at January 1, 2013. The options entitle executives to receive 1.4 million of LCI $1 par common shar

At year-end (December 31), Chan Company estimates its bad debts as 0.30% of its annual credit sales of $753,000. Chan records its Bad Debts Expense for that estimate. On the follow

#what are the limitations or disadvantages of accounting concept?

Ask questiJohn’s away at the moment, and his email provider has a size limit on the data that can be sent via email. What is a potential solution for John, and name a provider that

Q. Limitations of the five year period of analysis? A number of restrictions to the analysis potentially arise - The approach doesn't take account of future benefits/costs a

Q. What do you mean by Auditors Report? Auditors' Report - Written communication issued by an independent CERTIFIED PUBLIC ACCOUNTANT (CPA) describing the character of her or h