Fina 3080

FINA 3080EFG: Spring 2015

Problem Set 2 (Stocks and Portfolio Theory)

Prof. CAO

Hello and welcome to Problem Set #2!

There are 4 required questions (150 points total)

The problem set is due in the class, or the homework drop box in CYT Building (with label for each session) by 5pm

on March 23, 2015 (Monday). Please turn in one problem set for each individual or team of (up to) 3 students. The

team can be formed across sessions. Students in the same team receive the same score. Please indicate a

corresponding person to submit and receive the graded problem set. Do make a photocopy for self-study before

the submission. Solutions will be provided during office hours after the due date.

Instructions:



You should start working on these four questions as early as possible, even before all the related contents are

covered

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To receive full credit on the long answer questions, please show all work and calculations. Doing so will also

increase your opportunities for partial credit. When you’re performing the same calculation a number of

times, you only need to show the first full calculation. An answer with NO work, or work that does not

support the answer, will receive no credit;



Please put a box around your final answers;

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If you’re hopelessly confused or feel the need for clarification on a question, don’t be afraid to ask me, TA, or

student consultants.

Best of luck!

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Question 1 (60 Points)

Find the intrinsic value of a share of stock XYZ using the two-stage dividend discount model. The data for the

valuation model has been obtained from the Value Line Research Center. Because the report contains data from the

end of 2014, we will use the end of 2014 (after the 2014 dividend has been paid) as t = 0.

a) (5 pts) The XYZ’s beta from Value Line is 1.35. Assume that the risk-less rate of interest...