RATES OF RETURN AND EQUILIBRIUM    Stock C’s beta coefficient is bC  = 0.4, while Stock D’s is bD  = -0.5. (Stock D’s beta is negative, indicating that its return rises when returns on most other stocks fall. There are very few negative beta stocks, although collection agency stocks are sometimes cited as an example.) a.        If the risk-free rate is 7% and the expected rate of return on an average stock is 11%, what are the required rates of return on Stocks C and D? b.       For Stock C, suppose the current price, P0, is $25.00; the next expected dividend, D1, is $1.50; and the stock’s expected constant growth rate is 4%. Is the stock in equilibrium? Explain and describe what will happen if the stock is not in equilibrium.

EBK CFIN
6th Edition
ISBN:9781337671743
Author:BESLEY
Publisher:BESLEY
Chapter8: Risk And Rates Of Return
Section: Chapter Questions
Problem 17PROB
icon
Related questions
Question

RATES OF RETURN AND EQUILIBRIUM    Stock C’s beta coefficient is bC  = 0.4, while Stock D’s is bD  = -0.5. (Stock D’s beta is negative, indicating that its return rises when returns on most other stocks fall. There are very few negative beta stocks, although collection agency stocks are sometimes cited as an example.)

a.        If the risk-free rate is 7% and the expected rate of return on an average stock is 11%, what are the required rates of return on Stocks C and D?

b.       For Stock C, suppose the current price, P0, is $25.00; the next expected dividend, D1, is

$1.50; and the stock’s expected constant growth rate is 4%. Is the stock in equilibrium? Explain and describe what will happen if the stock is not in equilibrium.


 

 

 

 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 


Expert Solution
steps

Step by step

Solved in 5 steps with 3 images

Blurred answer
Knowledge Booster
Risk and Return
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
EBK CFIN
EBK CFIN
Finance
ISBN:
9781337671743
Author:
BESLEY
Publisher:
CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Corporate Fin Focused Approach
Corporate Fin Focused Approach
Finance
ISBN:
9781285660516
Author:
EHRHARDT
Publisher:
Cengage
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Intermediate Financial Management (MindTap Course…
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning
Financial Reporting, Financial Statement Analysis…
Financial Reporting, Financial Statement Analysis…
Finance
ISBN:
9781285190907
Author:
James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:
Cengage Learning