A Required Return Harley Davidson stock has a beta of 152 Th

A.

Required Return Harley Davidson stock has a beta of 1.52. The market risk premium is 9.5% and the risk free rate is 4%. What is Harley\'s required rate of return?

11.58%

14.83%

18.44%

14.44%

B.

Intrinsic Value A stock has a required return of 9%, a dividend of $.30 per share and an expected sale price in one year of $39.00. The intrinsic value of this stock is _______.

$30.09

$36.06

$29.60

$27.28

Solution

A.

As per CAPM,

Required rate of return = Risk free rate + (Beta* Market risk premium)

Required rate of return = 4% + (1.52*9.5%) = 18.44%

Hence, correct answer is 18.44%

B.

Intrinsic value of a stock = Present value of expected future payments

Intrinsic value of this stock = Present value of dividend + Present value of year end sale price

Intrinsic value of this stock = $0.30/1.09 + $39/1.09 = $36.055

Hence, correct answer is $36.06