*** Please Show All Work ***Jersey Jewel Mining has a beta coefficient

QUESTION

*** Please Show All Work ***Jersey Jewel Mining has a beta coefficient of 1.2. Currently the risk-free rate is 5 percent and the anticipated return on the market is 11 percent. JJM pays a $4.50 dividend that is growing at 6 percent annually.a. What is the required return for JJM?b. Given the require
r(m) = r(f) r(p) where, r(m) = market return = 11% (given) r(f) = risk free rate = 5% (given) r(p) = risk premium so, 11 = 5 r(p) hence, r(p) = 6% Required return for JJM = r(f) b* r(p) , where b = beta of JJM => = 5 1.2 * 6 = 12.2% Growth of dividend of JJM = 6% a) Required return from dividend after growth = 12.2 6 = 6.2%, (= 0.062) (ANSWER) b) Dividend = $ 4.5 value of stock = dividend/ return after growth = 4.5 / 0.062 = 72.58 ($) (ANSWER) c) If selling price of stock = $ 80. It is more than $ 72.58 for return of 6.2%. This means return at $ 80 price will be less

than expected 6.2%. Hence, the stock at $ 80 shall not be bought. Rather sell it if you have. (ANSWER) d) If b = 1, required return = 5 ! * 5 = 11% , and from dividend alone = 11- 6 = 5% So, value of stock shall be = 4.5/0.05 = 90 ($) (ANSWER) e) If price is $ 80, which is less than $ 90 for return of 5%. hence at $80 , return = 4.5/80 = 5.625%, so, the stock can be bought. (ANSWER)

ANSWER:

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