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Problem 5: (Note: j = ( j)(CorrjM)/M) OMeara Instruments is in...

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Finance

Problem 5:

(Note: imagej = ( imagej)(CorrjM)/imageM)

OMeara Instruments is in the process of evaluating the effect of different factors on its market value. OMeara expects to pay dividends of $3 a year from now (D1 = $3), and the growth rate in its dividends is 4 percent per year until infinity. OMeara estimates the following:

kRF = 6%, kM = 11%, imagej = 16%, imageM =10% and CorrjM = 0.50.

a. What is the required rate of return for OMeara and the current market value of its stock?

b. What is OMearas required rate of return and stock market value if everything stays the same, except that its correlation with the market increases to 0.75?

c. If all the conditions are as in (a) except that imagej increases to 64 percent and imageM increases to 20 percent, what is the required rate of return and market price for OMeara?

d. If all the conditions are as in (a) except that imagej decreases to 8 percent, what is the required rate of return and market price for OMeara?

B B

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