1) Sandy Corp believes the following probability distribution exists for its stock. What is the coefficient of

Question

1) Sandy Corp believes the following probability distribution exists for its stock. What is the coefficient of variation on the company's stock? Probability Stock's State of of State Expected the Economy Occurring Return Boom 0.45 25% Normal 0.50 15% Recession 0.05 5% 2. Sara Corporation just paid a dividend of D0 = $0.75 per share, and that dividend is expected to grow at a constant rate of 6.50% per year in the future. The company's beta is 1.25, the required return on the market is 10.50%, and the risk-free rate is 4.50%. What is the company's current stock price?

Help In Homework · Accepted Answer

1. Mean return of the stock = probabilityx return =0.45x 25+0.50x15+0.05x5 = 19% Standard deviation = ?probabilityx(return -mean return)2 Hence standard deviation of stock return: =?0.45x(25-19)2 + 0.50x (15-19)2 +0.05x(5-29)2 = ?34 = 5.83% We know that cofficient of variation : = Standard deviation/mean return x100 Hence cofficient of variation = 5.83/19 x100 = 30.68% Hence cofficient of variation of company's stock is 30.68% 2. Given that beta = 1.25 Market rate of return i.e. Rm = 10.5% Risk free rate of return i.e. Rf = 4.5% As per CAPM MODEL Required rate of return i.e. Re= Rf+(Rm-Rf) Hence Re = 4.5+(10.5-4.5)x1.25 I.e. Re = 12% Given that D0 =$ 0.75 Growth rate i.e. g = 6.5% Hence D1 i.e. dividend at year 1 : = D0 X (1+g) = 0.75x(1+0.065) = $0.799 We know that price of the stock: = D1/(Re -g) = 0.799/(0.12-0.065) = $14.53 Hence current price of the company's stock is $14.53

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1) Sandy Corp believes the following probability distribution exists for its stock

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