Exam 11: Risk and Rates of Return

Oakdale Furniture Inc.has a beta coefficient of 0.7 and a required rate of return of 15 percent.The market risk premium is currently 5 percent.If the inflation premium increases by 2 percentage points, and Oakdale acquires new assets which increase its beta by 50 percent, what will be Oakdale's new required rate of return?

Carlson Products, a constant growth company, has a current market (and equilibrium) stock price of $20.00.Carlson's next dividend, , is forecasted to be $2.00, and Carlson is growing at an annual rate of 6 percent.Carlson has a beta coefficient of 1.2, and the required rate of return on the market is 15 percent.As Carlson's financial manager, you have access to insider information concerning a switch in product lines which would not change the growth rate, but would cut Carlson's beta coefficient in half.If you buy the stock at the current market price, what is your expected percentage capital gain?

A firm cannot change its beta through any managerial decision because betas are completely market determined.

A financial analyst has been following Fast Start Inc., a new high-growth company.She estimates that the current risk-free rate is 6.25 percent, the market risk premium is 5 percent, and that Fast Start's beta is 1.75.The current earnings per share (EPS₀) is $2.50.The company has a 40 percent payout ratio.The analyst estimates that the company's dividend will grow at a rate of 25 percent this year, 20 percent next year, and 15 percent the following year.After three years the dividend is expected to grow at a constant rate of 7 percent a year.The company is expected to maintain its current payout ratio.The analyst believes that the stock is fairly priced.What is the current price of the stock?