9-5. NoGrowth Corporation currently pays a dividend of $2 per year, and it will continue to pay this
dividend forever. What is the price per share if its equity cost of capital is 15% per year?
With the simplifying assumption (as was made in the chapter) that dividends are paid at the end of the
year, then the stock pays a total of $2.00 in dividends per year. Valuing this dividend as a perpetuity, we
have,
P $2.00/ 0.15 $13.33
.
Alternatively, if the dividends are paid quarterly, we can value them as a perpetuity using a quarterly
discount rate of
1
4
(1.15) 1 3.556%
(see Eq. 5.1). Then
P $0.5010.03556 $14.06
.
10–29. What is an efficient portfolio?
An efficient portfolio is any portfolio that only contains systemic risk; it contains no diversifiable risk.
10–30. What does the beta of a stock measure?
Beta measures the amount of systemic risk in a stock
10–31. You turn on the news and find out the stock market has gone up 10%. Based on the data in Table
10.6, by how much do you expect each of the following stocks to have gone up or down: (1)
Starbucks, (2) Tiffany & Co., (3) Hershey, and (4) McDonald’s.
Beta*10%
Starbucks 8%
Tiffany & Co. 19.2%
Hershey 3.3%
