If a stock has a market yield of 12 percent, andif the risk-free rate is 4 percent, and the stock's beta is 1.2 and the market risk premium is 6 percent:
can anyone find
1) what the expected return of the stock,
2) identify its placement on the SML
and 3) whether the stock is fairly priced, overpriced, or under-priced.
2007-03-21 16:19:41 · 2 answers · asked by Munch_101 1 in Business & Finance ➔ Investing
sell your stock assp
2007-03-21 16:25:14 · answer #1 · answered by J 3 · 0⤊ 1⤋
Some information is missing in the question like growth rate. For that let us assume the roi(r) to be 15% and pay out ratio(p) 30%. Then growth rate g= rp/(1-rp)=0.15x0.30/(1-(0.15x0.30)=4.7%
Expected yield = div. yield + g= 12+4.7=16.7%
2)Required return=krf+beta(km-krf)=0.04+1.2(0.06-0.04)=
=6.4% which is its position on the Security Market Line.
Since no price is given it is not possible to find the answer to your third question. If Dividend was given say around $2 then P0=D1/ks-g where ks is the required return which is equal to 2/(.064-.047)=$117.64.
If the stock price is below this it is underpriced or above over priced.
2007-03-22 08:40:33 · answer #2 · answered by Mathew C 5 · 0⤊ 0⤋