Problem 2: (8 Total Points)
Suppose you construct a value-weighted index of three stocks, A, B, and C. The number of shares and
the share price are given in the table.
Stock
Shares
Outstanding
Share Price
A
25
$18.52
B
14
$9.74
C
34
$15.48
(a) What is Stock B's market capitalization? (3 points)
$136.36
(b) What is Stock B's weight of this value-weighted index? (3 points)
0.1211 = 12.11%
(c) Suppose the overall index increased in value by five percent. What would be the impact of the
index change on the price of Stock B? (2 points)
Unknown.
Problem 3: (7 Total Points)
You are considering buying shares of stock in the MNO Corporation. The forecast for the firm is steady
growth over the next decade. The firm just paid its annual dividend of $0.81 per share and has plans to
increase that amount by 3.4 percent annually indefinitely. You require a 7.5 percent return on this type of
security. What is your estimate of the value of this stock nine years from now (hint: find the price P9).
P9 = $27.60