1. Recife Corporation stock has a Beta of 1.39 and it will pay a dividend of $1.50 next year. The following table shows the various possible economic conditions. State of the economy for the next year__________Probability___________Expected return of t

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1. Recife Corporation stock has a Beta of 1.39 and it will pay a dividend of $1.50 next year. The following table shows the various possible economic conditions.

State of the economy for the next year__________Probability___________Expected return of the market

Good_____________________________________40%_______________________15%

Fair______________________________________30%________________________10%

Poor_____________________________________30%_________________________0%

The current riskless rate is 5%. The expected long-term rate of growth of Recife is 8%. Find the value of its common stock. Hint : assume that the predictions of the economy are short-term, perhaps over the next year. Also, assume that the growth of the dividends are long term (perhaps forever).

2. Belem Company stock currently sells at $21 per share. Given the uncertainty in the economy, you have estimated that after one year, the stock price and its dividend will have the following probabilty distribution.

Probability_______________Price/Share_______________Dividend/Share

10%______________________$26______________________$1.20

40%______________________$24______________________$1.10

40%______________________$22______________________$1.00

10%______________________$15______________________$0.90

The expected return of the market is 13% and the risk-free rate is 5%. Estimate the Beta of the stock.

3. Goiania Company has the same growth rate as Campinas Corporation. The current stock price of Goiania is $43 per share, and its dividend this year is $3. The riskless rate is 4% and the expected return on the market is 12%. Campinas stock is selling at $75 per share. Its dividend next year will be $4 a share and its Beta is 1.3. Find the Beta of the Goiania stock.

 
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