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The Problem Set is provided to you to enable you to practice the
concepts outlined in the textbook. Select THREE completed problems
from the assignment and post your solutions to those problems. In
your solutions, provide an explanation as to why you choose the
answer.
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