3. As a financial analyst, you are tasked with finding the price per share of XYZ, a telecom company. (a) For this part, assume that the Gordon growth model for stock valuation holds. The typical...

Extracted text: 3. As a financial analyst, you are tasked with finding the price per share of XYZ, a telecom company. (a) For this part, assume that the Gordon growth model for stock valuation holds. The typical company in the telecom industry has a ratio of next period's dividend to 2%, pays out 40% of earnings as dividends, and generates a return on equity of 15%. Your analysis suggests that the discount rate of the typical current price D1/Po company in the telecom industry is appropriate to value XYZ's stock. What is this discount rate? 2 (b) For this part of the analysis, the discount rate is from part (a). You assume that the differential dividend growth approach (i.e., the two-stage DDM) can be used to correctly value XYZ's stock. XYZ just paid $2 per share in dividends. You estimate that dividends will grow at 20% for next four years until year 4, and then at 5% perpetually. Find the current price per share of XYZ.


Extracted text: 4. Suppose that we have three stocks with the following parameter values. Expected Standard Correlations of Returns Return Deviation Stock 1 Stock 2 Stock 3 Stock 1 0.20 0.25 1.00 0.30 0.40 Stock 2 0.25 0.35 1.00 0.60 Stock 3 0.15 0.15 1.00 (a) Find the expected return and standard deviation of a portfolio with 25% in stock 1, 50% in stock 2, and 25% in stock 3. Show your steps. (b) For the portfolio in part (a), find the covariance of its return with the return of the equally weighted portfolio of stock 1 and stock 2. (Equal weighting for a two-asset portfolio means that the weights are 50% and 50%.) Show your steps. (c) Someone claims that the portfolio in part (a) is the tangency portfolio of these three stocks. (Note that the concept of the tangency portfolio was explained in Class 5.) Do you believe this claim? Justify your answer. Hint: It may be useful to compare the portfolio in part (a) to a portfolio with somewhat different weights.