Risk and Return Measures (all regarding Class A Common Stock) Work and Solution...
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Accounting
Risk and Return Measures
(all regarding Class A Common Stock)
Work and Solution
1. Find the value of FBs stock in dollars using the Constant-Growth Dividend Model. Assume: dividends paid next year is $14; the constant growth rate of dividends is 9%; the required return rate is 16%.
2. Use the Capital Asset Pricing Model to find the cost of equity (common stock) in percent. Assume FBs beta is 1.2; the risk-free yield on a 30 year long term US Treasury bond is 2.6%; and the expected market return is 11%.
3. Find the Expected Return in percent and the Standard Deviation of the Return on FBs common stock.
Using these parameters:
Economy / Probability / Return:
Great / .2 / 20%
Good / .4 / 12%
Level / .3 / 10%
Poor / .1 / -10%
Answer & Explanation
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