Dividend Discount Model

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

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

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a. There is a large recession.

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

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

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%.

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%.


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