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 5.20