Answer Happy

Topvax is a pharmaceutical company. Dividends are expected to grow at a rate of 5% for the foreseeable future The required return is 15% and the company just paid a dividend of $4.27 per share. (a) The stock is currently trading at $35 per share. Compute the fair value of the stock and decide whether it is a good time to invest in this stock. (6 marks) (b) If the market return is 11% and the risk-free rate is 3%, what is the beta of the stock? What does this beta imply about the stock's volatility relative to the market? (6 marks) (C) Given the same information in (b), you are considering forming a portfolio with the following composition: Expected Return 10% % Beta 0.875 Investment Weight Stock A 50% S&P500 index fund 20% Treasury bills 30% 1.0 (i) Compute the portfolio expected return and beta. (6 marks) (ii) If you replace stock A with Topvax in this portfolio, would the portfolio beta be higher or lower; would the portfolio expected return be higher or lower? Explain without doing any calculations. (6 marks)