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1. If RF = 6 percent, b = 1.3, and the ERP = 6.5 percent, compute Ke(the
required rate of return).
2. If in problem 1 the beta (b) were 1.9 and the other values remained the
same, what is the new value of Ke? What is the relationship between a higher
beta and the required rate of return (Ke)?
3. Assume the same facts as in problem 2, but with an ERP of 9 percent.
What is the new value for Ke? What does this tell you about investors’
feelings toward risk based on the new ERP?
4. Assume D1 = $1.60, Ke= 13 percent, g = 8 percent. Using Formula 7–5,
for the constant growth dividend valuation model, computeP0.
5. J. Jones investment bankers will use a combined earnings and dividend
model to determine the value of the Allen Corporation. The approach they
take is basically the same as that in Table 7–2 in the chapter. Estimated
earnings per share for the next five years are:
2008
$3.20
2009
3.60
2010
4.10
2011
4.62
2012