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1-a) Compute the expected rate of return for intel common stock, which has a 1
1-a) Compute the expected rate of return for intel common stock, which has a 1.2 beta. The risk free rate is 5% snd the market portfolio has an expected return of 12%.
b) Why is the rate you computed the expected return?
2) The next year the common stock of Gold Corp. will pay a dividend of $3.39 per share. If the company is growing at a rate of 2.85 percent per year, and your required rate of return is 11.36 percent, what is Gold's company stock worth to you?
Round the answer to two decimal places.
Expert Solution
1-a) Computation of the expected rate of return:-
Expected rate of return = Risk free rate + Beta * (Expected market return - Risk free rate)
= 5% + 1.2 * (12% - 5%)
= 5% + (1.2 * 7%)
= 5% + 8.4%
= 13.4%
b) The 13.4% fair rate compensates the investor for the time value of money and for assuming risk.
2) Computation of the stock price:-
Stock price = D1 / (Required return - Growth rate)
= $3.39 / (11.36% - 2.85%)
= $3.39 / 8.51%
= $39.84
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