/lake Part B (10 marks) Deutsche Bank has decided to interview you for an equities...
90.2K
Verified Solution
Link Copied!
Question
Finance
/lake Part B (10 marks) Deutsche Bank has decided to interview you for an equities analyst role. Part of the interview requires that you answer three questions about a company with the following data: Current stock price: $50.00 Expected end of period dividend $3.75 Equity beta: 0.75 Market risk premium 8% Risk-free rate 5% Tax rate: 0% Required: (a) What is the weighted average cost of capital (WACC) of this company if the debt/equity ratio is 0.25 and the debt is considered to be risk-free? (5 marks) [Note: In your computations, use the WACC equation under the classical tax system] (b) What is the expected end of period price? Hence, what is the expected capital gain? (3 marks) (c) Suppose the equities analyst agrees with all the data given above, but expects an end of period price for this stock of $53. Show that this stock does not lie on the security market line. If the market as a whole would adopt the view of the equities analyst, then how does the stock price have to move so that expected returns are consistent with the CAPM again? (2 marks)
Answer & Explanation
Solved by verified expert
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
