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1. An investor has a stock portfolio consisting of only three stocks (A, B and C). The relevant facts are: stock      stock price         number of stocks owned        ß

A           $20                  16                    1.4

B           $12                  24                    1.1
C           $44                  18                    0.85

Calculate the ß of the portfolio.

2. Do problems 6-8, 6-10 and 6-12 through 6-14 of the text.

The beta's are found by historical covariance ÷ historical market variance.

3. A firm’s most recent dividend was $4.00. The firm is expected to grow at 12% forever. The required rate of return on equity (i.e. the discount rate) is 18%. Find today’s stock price.

4. A firm’s most recent dividend was $2.00. The firm is expected to grow at 12% for the next 5 years, and then grow forever at 8%. The required rate of return on equity (i.e. the discount rate) is 14%. Find today’s stock price.

5. A firm’s most recent dividend was $2.00. The firm is expected to grow at 12% for the next 5 years. After five years, the terminal value is found using a P/E ratio of 16. The dividend payout ratio is 50%. The required rate of return on equity (i.e. the discount rate) is 14%. Find today’s stock price.

6. Do problems 7-2 through 7-5 and 7-13 of the text.

7. You are given the following information for company X and the financial markets.

• ß of stock X = 1.4

• recent dividend = $2.00

• constant growth rate = 8%

• projected stock market return = 14%

• yield on a 10-year treasury = rRF = 6.46%

(a) Using the constant dividend growth model, calculate today’s stock price. (4 points).

(b) Refer back to part (a). If new information indicates that expected inflation will now be 1.5% higher (than previously expected), what is the new stock price? Hint: calculate the new required rate of return using CAPM, then find the new stock price. What is the relationship between the original rate of return and price and the new rate of return and price? Explain your answer in terms of financial thinking.