# Zipcar

Autor: amitr89 • July 23, 2015 • Presentation or Speech • 5,411 Words (22 Pages) • 332 Views

**Page 1 of 22**

QUESTION BANK ON CF-1 ON BOND & STOCK VALUATION

Q 2. The risk-free rate of return, Rf, is 9%. The expected rate of return on the market portfolio is 13%. The expected rate of growth for the dividend of firm A is 7% in perpetuity. The last dividend paid on the equity stock of the firm was Rs.2.00. The beta of firm A’s equity stock is 1.2. Answer the followings :

(a) What is the equilibrium price of the equity stock of firm A ?

(b) How would the equilibrium price change when (i) the inflation premium increases by 2%, (ii) the expected growth rate increases by 3 more %, and (iii) the beta of A’s equity rises to 1.3.

Q 3. Explain clearly with the help of diagrams how/under what conditions the required return of a security changes due to movement along the Security Market Line (SML) and shift of the Security Market Line (SML).

Q 4. The expected return on the market is 12%, with a standard deviation of 21%. The risk-free rate is 8%. Information is available for the following five stocks :

Stock | Beta | Expected Return, E(ri) |

1 | 0.9 | 12 |

2 | 1.3 | 13 |

3 | 0.5 | 11 |

4 | 1.1 | 12.5 |

5 | 1.0 | 12 |

:: 2 ::

- Calculate the required return, R(ri) for each stock.
- With these required returns and betas, think of a line connecting them – what is this line ?
- Assume that an investor, using fundamental analysis, develops the estimates labeled E(ri) for these stocks. Determine which are undervalued and which are overvalued.
- What is the market’s risk premium (per unit risk) ?

Q 5. Given the following information : Exp. Return of market, E(rm), 12%, Standard Deviation (SD) of market, 21%; Risk-free rate, Rf, 8%; Correlation Coefficient between :

Stock A & market, 0.8, Stock B & market, 0.6, SD of stock A, 25%; SD of stock B, 30%.

- Calculate beta for stock A & B
- Calculate the required return for each stock

Q 6. Assume that the risk-free rate is 7% and exp. market return is 13%. Show that the security market line (SML) is : R(ri) = 7.0 + 6.0β .

Assume that an investor has estimated the following values for six different corporations:

Corporation | βi | Exp. Return, E(ri) |

AB | 0.8 | 12 |

CD | 0.9 | 13 |

EF | 1.0 | 14 |

GH | 1.2 | 11 |

IJ | 1.2 | 21 |

KL | 1.5 | 10 |

Calculate the R(ri) for each corporation using the SML and evaluate which securities are overvalued and which are undervalued.

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