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Exercise 2 (points)_;_ Stock of ABC corporation currently trades at $ 10 per share. ABC...

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Finance

Exercise 2 (points)_;_ Stock of ABC corporation currently trades at $ 10 per share. ABC has never paid any dividend and i s not expected to pay any dividend over the next year. The beta of ABC stock is 2. The market risk premium is 8 percent and the risk free rate is 4 percent.

Answer the following questions (assigned poi nts 111

parenthesis):

  1. What is the required return on ABC stock? What is the expected price per ABC share one year from now? (2 points)

b.Assume ABC is a zero growth company, what cash flow to equity would you expect during the following year according to the dividend growth model? What if i t grows perpetually at an annual I 0 percent rate? (Make use of your result in 4a.) (2 points)

c. If the price of the market portfolio falls 5 percentage points tomorrow, what price change would you expect for ABC stock according to the CAPM? At what price per share would ABC trade then, assuming zero growth as in 4b.)? (2 points)

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