FIN 402 Expect Success/uophelp.com FIN 402 Expect Success/uophelp.com | Page 13

11. Security Analyst A thinks the Collins Corporation is worth 14 times
current earnings. Security Analyst B has a different approach. He assumes
that 45 percent of earnings (per share) will be paid out in dividends and the
stock should provide a 4 percent current dividend yield. Assume total
earnings are $12 million and that 5 million shares are outstanding.
a. Compute the value of the stock based on Security Analyst A’s approach.
b. Compute the value of the stock based on Security Analyst B’s approach.
c. Security Analyst C uses the constant dividend valuation model approach
presented in Chapter 7 as Formula 7–5 on page 147. She uses Security
Analyst B’s assumption about dividends (per share) and assigns a growth
rate, g, of 9 percent and a required rate of return (Ke) of 12 percent. Is her
value higher or lower than that of the other security analysts?
12. Using the formula for the security market line (Formula 21–7 on page
534), if the risk-free rate (RF) is 7 percent, the beta (bi) is 1.25, and the
market rate of return (KM) is 11.8 percent, compute the anticipated rate of
return (Ki).
13. If another security had a lower beta than indicated in problem 10,
would Kibe lower or higher? What is the logic behind your answer in
terms of risk?
14. The capital market line (CML) as defined by the capital asset pricing
model is characterized by all of the following except
15. The beta coefficient is a measure of
16. Systematic risk is rewarded with a premium in the marketplace
because
17. Which of the following are assumptions of the capital asset pricing
model?
18. The correlation coefficient: