(Stock Valuation) Today's date is Monday, January 3, 2022. The following information pertains to the stocks of two fictitious companies, ABC and DEF on January 3, 2022. ABC Corp. Current price on 1/3/2022 Most recent dividend on 12/31/2021 Expected dividend growth rate $50 $10 4% 0.5 4% 4% 7% 0 explain. DEF Corp. $730 N/A (Never Paid) Beta 1-Year Price Change Dividend Yield Standard Deviations of Returns Correlation of ABC and DEF returns The long-term Treasury yield is 3%, and the historical average market return is 12%. (a) Calculate the required rate of return of the stock ABC. (b) Assessing from the dividend stream, is ABC undervalued or overvalued? Show your work and 1.9 22.5% N/A 50% (c) Calculate total annual return from the stock. Assessing from the total annual return, is ABC undervalued or overvalued? Show your work and explain. (d) Suppose the Federal Reserve raises the Fed Funds Rate, how would this affect your valuation of ABC? Explain. (e) Your colleague suggests that you should invest only in ABC, and no part in DEF, to minimize the risks. Is this true or false? Explain verbally. (f) Assessing from the dividend stream, is DEF undervalued or overvalued? Briefly explain.
(Stock Valuation) Today's date is Monday, January 3, 2022. The following information pertains to the stocks of two fictitious companies, ABC and DEF on January 3, 2022. ABC Corp. Current price on 1/3/2022 Most recent dividend on 12/31/2021 Expected dividend growth rate $50 $10 4% 0.5 4% 4% 7% 0 explain. DEF Corp. $730 N/A (Never Paid) Beta 1-Year Price Change Dividend Yield Standard Deviations of Returns Correlation of ABC and DEF returns The long-term Treasury yield is 3%, and the historical average market return is 12%. (a) Calculate the required rate of return of the stock ABC. (b) Assessing from the dividend stream, is ABC undervalued or overvalued? Show your work and 1.9 22.5% N/A 50% (c) Calculate total annual return from the stock. Assessing from the total annual return, is ABC undervalued or overvalued? Show your work and explain. (d) Suppose the Federal Reserve raises the Fed Funds Rate, how would this affect your valuation of ABC? Explain. (e) Your colleague suggests that you should invest only in ABC, and no part in DEF, to minimize the risks. Is this true or false? Explain verbally. (f) Assessing from the dividend stream, is DEF undervalued or overvalued? Briefly explain.
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter10: Stockholder's Equity
Section: Chapter Questions
Problem 69E:
Stock Dividends
Crystal Corporation has the following information regarding its common stock: S10...
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Question a b, and c please
Transcribed Image Text:5. (Stock Valuation) Today's date is Monday, January 3, 2022. The following information pertains to the stocks
of two fictitious companies, ABC and DEF on January 3, 2022.
ABC Corp.
$50
$10
4%
0.5
4%
4%
7%
0
Current price on 1/3/2022
Most recent dividend on 12/31/2021
Expected dividend growth rate
Beta
1-Year Price Change
Dividend Yield
Standard Deviations of Returns
(a)
(b)
DEF Corp.
$730
N/A (Never Paid)
Correlation of ABC and DEF returns
The long-term Treasury yield is 3%, and the historical average market return is 12%.
Calculate the required rate of return of the stock ABC.
Assessing from the dividend stream, is ABC undervalued or overvalued? Show your work and
explain.
1.9
22.5%
N/A
50%
(c)
Calculate total annual return from the stock. Assessing from the total annual return, is ABC
undervalued or overvalued? Show your work and explain.
(d)
Suppose the Federal Reserve raises the Fed Funds Rate, how would this affect your valuation
of ABC? Explain.
(e)
Your colleague suggests that you should invest only in ABC, and no part in DEF, to minimize
the risks. Is this true or false? Explain verbally.
(f)
Assessing from the dividend stream, is DEF undervalued or overvalued? Briefly explain.
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