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1) Multiple choice questions A share is expected to pay dividends of $1 in one year, $1
1) Multiple choice questions A share is expected to pay dividends of $1 in one year, $1.20 in two years and then $1.30 in three years with this amount lasting in perpetuity. The current intrinsic value of this share given a discount rate of 5% is: Select one: $26.43 $25.62 $38.43 $25.10
2)The following are estimates of the single index model for two stocks: 1 Stock Expected Return Beta Nonsystematic SD 12.8% 2.5 9% 2 6.6% 0.5 3% The market index has an expected return of 8% and a standard deviation (SD) of 9% and the risk-free rate is 5%. Calculate the weights in stocks 1 and 2 in the optimal risky portfolio consisting of Stocks 1 and 2 and market index.
Expert Solution
1)
| Solution: | |||||
| D1: $ 1.00 | |||||
| D2 =$ 1.20 | |||||
| D3 =$ 1.30 and this dividend lasting till perpetuity | |||||
| Stock price at the end of 3 year = $ 1.30 / 0.05 = $ 26 | |||||
| Discount rate : 5% | |||||
| (i) Calculation of current intrinsic value as on Today : | |||||
| Year | Cashflow | PVF @ 5% | Present Value | ||
| 1 | $1.00 | 0.9524 | $0.95 | ||
| 2 | $1.20 | 0.9070 | $1.09 | ||
| 3 | $1.30 | 0.8638 | $1.12 | ||
| 3 | $26.00 | 0.8638 | $22.46 | ||
| Present Value of share | $25.62 |
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