FIN301Case3TemplateYourLastName.docx

Trident University

FIN301: Principles of Finance

Module 3: Case Template

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Question 1:

Using a dividend discount model, what is the value of a stock that pays an annual dividend of $5 that is not expected to grow, and the discount rate is 10%?

ANSWER:

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What will be the value of the stock if the dividend is expected to grow 5% per year?

ANSWER:

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Question 2:

Explain whether each of the following is systematic or unsystematic risk using references to the required background readings:

a. There is a large recession.

ANSWER:

☐Systematic Risk

☐Unsystematic Risk

Explain: Click or tap here to enter text.

b. It is discovered that a company lied about its earnings and it is not nearly as profitable as they claimed.

ANSWER:

☐Systematic Risk

☐Unsystematic Risk

Explain: Click or tap here to enter text.

c. The CEO of a successful company gets arrested for some serious crimes, and the company has trouble finding a good replacement.

ANSWER:

☐Systematic Risk

☐Unsystematic Risk

Explain: Click or tap here to enter text.

Question 3:

Use the CAPM to calculate the following:

a. The expected return of a stock with a beta of 2, and risk-free rate of 1%, and a market return of 7%.

ANSWER:

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b. The beta if the expected return of the stock is 8%, the risk-free rate is 2%, and the market rate of return is 6%.

ANSWER:

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Question 4:

Do you think the following companies would have a high, low, or average beta? Explain your answer using references from the background readings and your knowledge of CAPM and beta:

a. The ACME Umbrella company’s stock goes up a lot when it rains but goes down when it is sunny. Nothing else but the weather seems to impact ACME’s stock price.

ANSWER:

☐High Beta

☐Low Beta

☐Average Beta

Explain: Click or tap here to enter text.

b.