1 . If RF = 6 percent , b = 1.3 , and the ERP = 6.5 percent , compute Ke ( the required rate of return ).
2 . If in problem 1 the beta ( b ) were 1.9 and the other values remained the same , what is the new value of Ke ? What is the relationship between a higher beta and the required rate of return ( Ke )?
3 . Assume the same facts as in problem 2 , but with an ERP of 9 percent . What is the new value for Ke ? What does this tell you about investors ’ feelings toward risk based on the new ERP ?
4 . Assume D1 = $ 1.60 , Ke = 13 percent , g = 8 percent . Using Formula 7 – 5 , for the constant growth dividend valuation model , computeP0 .
5 . J . Jones investment bankers will use a combined earnings and dividend model to determine the value of the Allen Corporation . The approach they take is basically the same as that in Table 7 – 2 in the chapter . Estimated earnings per share for the next five years are :
2008 $ 3.20 2009 3.60 2010 4.10 2011 4.62 2012 5.20