Question

1. Suppose a firm is expected to earn $5 per share next year. The firm has a beta of 1.2, the expected return on the market is 8%, and the risk free rate is 2%. (a) What is the value of the firm if it pays out all of its earnings as dividends? (b) Suppose the firm decides to reinvest 40% of its earnings into future investment projects. The firm's return on equity (ROE) is 15%. What is the value of the firm, and what is the present value of growth opportunities (PVGO)? 2. Suppose a firm is expected to pay a dividend of $2 per share next year, and $4 per share the year after that. From then on, dividends are expected to grow at a constant rate of 4% per year. The firm's required rate of return is 8% per year. What is the value of the firm? 3. A call option on a stock has a strike price of $100, and a premium of $2. Compute the profit to the long and short position in the call option if the final stock price is $97. 4. A put option on a stock has a strike price of $100, and a premium of $1.50. Compute the profit to the long and short position in the call option if the final stock price is $97.

          1. Suppose a firm is expected to earn $5 per share next year. The firm has a beta of 1.2, the expected return on the market is 8%, and the risk free rate is 2%.

(a) What is the value of the firm if it pays out all of its earnings as dividends?

(b) Suppose the firm decides to reinvest 40% of its earnings into future investment projects. The firm's return on equity (ROE) is 15%. What is the value of the firm, and what is the present value of growth opportunities (PVGO)?

2. Suppose a firm is expected to pay a dividend of $2 per share next year, and $4 per share the year after that. From then on, dividends are expected to grow at a constant rate of 4% per year. The firm's required rate of return is 8% per year. What is the value of the firm?

3. A call option on a stock has a strike price of $100, and a premium of $2. Compute the profit to the long and short position in the call option if the final stock price is $97.

4. A put option on a stock has a strike price of $100, and a premium of $1.50. Compute the profit to the long and short position in the call option if the final stock price is $97.

1. Suppose a firm is expected to earn 5 per share next year. The firm has a beta of 1.2, the expected return on the market is 8%, and the risk free rate is 2%.

(a) What is the value of the firm if it pays out all of its earnings as dividends?

(b) Suppose the firm decides to reinvest 40% of its earnings into future investment projects. The firm's return on equity (ROE) is 15%. What is the value of the firm, and what is the present value of growth opportunities (PVGO)?

2. Suppose a firm is expected to pay a dividend of2 per share next year, and 4 per share the year after that. From then on, dividends are expected to grow at a constant rate of 4% per year. The firm's required rate of return is 8% per year. What is the value of the firm?

3. A call option on a stock has a strike price of100, and a premium of 2. Compute the profit to the long and short position in the call option if the final stock price is97.

4. A put option on a stock has a strike price of 100, and a premium of1.50. Compute the profit to the long and short position in the call option if the final stock price is 97.

Added by Glenn H.

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