JJM has a beta coefficient of 1.2. currently the risk free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $4.50 dividend that is growing at 4 percent annually.A. what is the required return for JJM?B. GIVEN THE REQUIRED RETURN, WHAT IS THE VALUE OF THE STOCK?C. IF THE STOCK IS SELLING FOR $100, WHAT SHOULD YOU DO?D. IF THE BETA COEFFICIENT DECLINES TO 1.0, E=WHAT IS THE NEW VALUE OF THE STOCK?E. IF THE PRICE REAMINS $100, WHAT COURSE OF ACTION  SHOULD YOU TAKE GIVEN THE VALUATION IN D?

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Asked Mar 4, 2019
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JJM has a beta coefficient of 1.2. currently the risk free rate is 2 percent and the anticipated return on the market is 8 percent. JJM pays a $4.50 dividend that is growing at 4 percent annually.

A. what is the required return for JJM?

B. GIVEN THE REQUIRED RETURN, WHAT IS THE VALUE OF THE STOCK?

C. IF THE STOCK IS SELLING FOR $100, WHAT SHOULD YOU DO?

D. IF THE BETA COEFFICIENT DECLINES TO 1.0, E=WHAT IS THE NEW VALUE OF THE STOCK?

E. IF THE PRICE REAMINS $100, WHAT COURSE OF ACTION  SHOULD YOU TAKE GIVEN THE VALUATION IN D?

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Expert Answer

Step 1

A. what is the required return for JJM?

Required return, Ke = Risk free rate + Beta x (Anticipated return on market - risk free rate) = 2% + 1.2 x ( 8% - 2%) = 9.2%

Step 2

B. GIVEN THE REQUIRED RETURN, WHAT IS THE VALUE OF THE STOCK?

Ke = 9.2% (as calculated in part (A)

Dividend, D0 = $ 4.50

Growth rate in dividend = g = 4%

Expected dividend next year, D1 = D0 x (1 + g) = 4.50 x (1 + 4%) = $ 4.68

Hence, Value of the stock, P = D1 / (Ke - g) = $ 4.68 / (9.2% - 4%) = $ 90.00 per share.

Step 3

C. IF THE STOCK IS SELLING FOR $100, WHAT SHOULD YOU DO?

Sale Price > Intrisnsic value of the stock. Hence, sometime in future the val...

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