Problem 1: (2 points) Toyota’s stock recently paid a dividend of $2. Toyota’s dividend is projected to increase 20% for 3 years, after which dividends are expected to grow at a rate of 10% forever. The company’s stock has a beta of 1.2, the risk free rate is 8%, and the market risk premium is 5%.

a. What is the expected dividend per share for each of the next 4 years?

b. What is the firm's horizon, or terminal, value?

c. What is the firm's intrinsic value today?

d. Assuming the market is in equilibrium, what does the market believe will be the stock price at the end of 2 years?

Problem 2: (2 points)

Stocks A and B have the following probability distributions of expected future returns:

Probability

A (%)

B (%)

0.2

-5

3

0.4

20

8

0.2

31

12

0.2

40

24

Calculate the expected rate and standard deviation of returns for each stock. (1 point)
Calculate the coefficient of variation for each stock and for the portfolio. Assuming you are a risk-averse investor, would you prefer to hold Stock A or Stock B. Why? (1 point)