(9 pts) 3.Your stockbroker has called has called to tell you that Microsoft Corporation (MSFT) would be a good buy today at $42.00 per share. The broker believes that one year from today Microsoft will be selling for $48.00. The expected return on MSFT has a standard deviation of 10 percent. The market risk premium for the S&P 500 has averaged 5.5 percent.

Required:

•What is the probability that you would earn less than your required rate of return?

•What is the probability that you would earn a return that is not negative?

•Explain why you would or would not buy Microsoft.

(8 pts) 4.James bought a bond when it was issued by Gamma Corporation 14 years ago. The bond, which has a $1,000 face value and a coupon rate equal to 12 percent, matures in six years. Interest is paid every six months; the next interest payment is scheduled for six-months from today. If the yield on similar risk-investments is 8 percent, what is the current market value (price) of the bond?

(9 pts) 5. Sigma’s preferred stock is selling for $40 per share in the market and pays a $5.00 annual dividend.

•What is the current return on the stock?

•If an investor has a required rate of return of 8 percent, what is the value of the stock for that investor?

•Should the investor acquire the stock?

(10 pts) 6.Jameson Corporation will pay an annual dividend of $1.35 two years from now. Analysts expect this dividend to grow at 15% per year thereafter until the sixth year. After that, growth will level off at 5% per year. According to the dividend-discount model, what is the value of a share of Jameson’s stock if the firm's equity cost of capital is 10%? Should an investor pay $30 per share for the stock? Explain.

Subject | Business |

Due By (Pacific Time) | 07/26/2014 06:59 am |

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