Project #67613 - FIN-355-M80-INVESTMENTS

You are a financial analyst and are considering Firm XYZ for possible addition to a client's portfolio. You use Gordon's constant growth model to determine the fair value of securities to be added to any client portfolio. Firm XYZ has a current dividend (Do) of $1.00 which is expected to grow at a constant rate of
5% indefinitely. Assume the risk free rate is 6% and the market return is 12% and Firm XYZ has a beta of 1.5. If the current market value of Firm XYZ is $15.00 should this security be added to your client's portfolio? In solving this problem be sure to 1) translate the above data into the appropriate equations, 2) solve for the Gordon model value of the security and 3) decide whether to add the security to your client's portfolio and explain why.

Sample Solution
1) required return on equity (sml) = 6 + (12-6)1.5 = 15
Gordon Model Price = 1(1.05)/(.15-.05)

2) Solving for gordon model price = 10.5

3) Don't add it to the portfolio because the gorden model price is less than the current price.

Subject Business
Due By (Pacific Time) 04/26/2015 12:00 am
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