Please answer the following finance questions. PLEASE SHOW AND EXPLAIN ALL WORK!
ID: 2621600 • Letter: P
Question
Please answer the following finance questions. PLEASE SHOW AND EXPLAIN ALL WORK!
1. Recife Corporation stock has a Beta of 1.39 and it will pay a dividend of $1.50 next year. The following table shows the various possible economic conditions.
State of the economy for the next year__________Probability___________Expected return of the market
Good_____________________________________40%_______________________15%
Fair______________________________________30%________________________10%
Poor_____________________________________30%_________________________0%
The current riskless rate is 5%. The expected long-term rate of growth of Recife is 8%. Find the value of its common stock. Hint : assume that the predictions of the economy are short-term, perhaps over the next year. Also, assume that the growth of the dividends are long term (perhaps forever).
2. Belem Company stock currently sells at $21 per share. Given the uncertainty in the economy, you have estimated that after one year, the stock price and its dividend will have the following probabilty distribution.
Probability_______________Price/Share_______________Dividend/Share
10%______________________$26______________________$1.20
40%______________________$24______________________$1.10
40%______________________$22______________________$1.00
10%______________________$15______________________$0.90
The expected return of the market is 13% and the risk-free rate is 5%. Estimate the Beta of the stock.
3. Goiania Company has the same growth rate as Campinas Corporation. The current stock price of Goiania is $43 per share, and its dividend this year is $3. The riskless rate is 4% and the expected return on the market is 12%. Campinas stock is selling at $75 per share. Its dividend next year will be $4 a share and its Beta is 1.3. Find the Beta of the Goiania stock.
Explanation / Answer
1.
Expected return on market = 15*.4+10*.3+0 = 9%
Expected retun on stock = 5+1.39*(9-5)= 10.56%
Stock price = (D1/r-g) = 1.5/(.1056-.08) = $58.59