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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:
19. The standard deviation of a risk-free asset is:
20. A good way to minimize risk and receive an optimum return on your
portfolio is: