4. The annual risk-free rate of return is 2 percent and the investor believes that the market will rise annually at 7 percent. If a stock has a beta coefficient of 1.5 and its current dividend is $1, what should be the value of the stock if its earnings and dividends are growing annually at 4 percent?
7. Your broker suggests that the stock of QED is a good purchase at $25. You do an analysis of the firm, determining that the $1.40 dividend and earnings should continue to grow indefinitely at 5 percent annually. The firm’s beta coefficient is 1.34, and the yield on Treasury bills is 1.4 percent. If you expect the market to earn a return of 8 percent, should you follow your broker’s suggestion?
You purchase a stock for $40 and sell it for $50 after holding it for ﬁve years. During this period you collected an annual dividend of $2. Did you earn more than 12 per-cent on your investment? What was the annual dollar-weighted rate of return?
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