(a) What is meant by the term alpha? (b) Suppose the CAPM holds. A stock has a beta of 0.8. If the risk free-rate is 4% and the market risk premium is 6%, what is the expected return on this stock? (c) Now suppose that this stock is a preference share that is expected to pay a constant dividend of $7 per annum, in perpetuity. Using your answer in (b), and assuming that the CAPM is correct, what should the share price be? (d) If the observed share price is $85, is the stock over-valued or under-valued? (e) What is the alpha for this stock?

(a) What is meant by the term alpha? (b) Suppose the CAPM holds. A stock has a beta of 0.8. If the risk free-rate is 4% and the market risk premium is 6%, what is the expected return on this stock? (c) Now suppose that this stock is a preference share that is expected to pay a constant dividend of $7 per annum, in perpetuity. Using your answer in (b), and assuming that the CAPM is correct, what should the share price be? (d) If the observed share price is $85, is the stock over-valued or under-valued? (e) What is the alpha for this stock?

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 16P: Crisp Cookware’s common stock is expected to pay a dividend of $3 a share at the end of this year...

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