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BUS 405 Week 1 DQ 1 Blumes Formula, Allocation, and
Selection
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Abbott Laboratories Problem. After reading the Value Line figures and
information on Abbott Laboratories in the Questions and Problems
section of Chapter 6 (just before Problem 27), complete Problems 27,
28, 29, 30, and 31 and submit to your instructor. Show your calculations
and in your response to problem 31 write a 100 to 200 word defense of
your position as to the value of Abbott Laboratories stock at its current
price of $50 per share.
27. What is the sustainable growth rate and required return for Abbott
Laboratories? Using these values, calculate the 2010 share price of
Abbott Laboratories Industries stock according to the constant dividend
growth model.
28. Using the P/E, P/CF, and P/S ratios, estimate the 2010 share price for
Abbott Laboratories. Use the average stock price each year to calculate
the price ratios.
29. Assume the sustainable growth rate and required return you
calculated in Problem 27 are valid. Use the clean surplus relationship to
calculate the share price for Abbott Laboratories with the residual
income model.
30. Use the information from the previous problem and calculate the
stock price with the clean surplus dividend. Do you get the same stock
price as in the previous problem? Why or why not?
31. Given your answers in the previous questions, do you feel Abbott
Laboratories is overvalued or undervalued at its current price of around
$50? At what price do you feel the stock should sell?
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Because you can observe all of the variables except r2, the spot rate for
two years, you can solve for this interest rate. Suppose there is a zero
coupon bond with one year to maturity that sells for $949 and a two-year
bond with a 7.5 percent coupon paid annually that sells for $1,020. What
is the interest rate for two years? Suppose a bond with three years until
maturity and an 8.5 percent annual coupon sells for $1,029. What is the
interest rate for three years?
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You have been given the following return information for two mutual
funds (Papa and Mama), the market index, and the risk-free rate. Year
Papa Fund
Mama Fund
Market
Risk-Free
2008
-12.6%
-22.6
-24.5%
1%
2009
25.4
18.5
19.5
2010
8.5
9.2
9.4
2011
15.5
8.5
7.6
2012
2.6
-1.2
-2.2
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State of Economy
Recession
.30
-8%
Normal
.40
13
Boom
.30
23
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b. If a portfolio of the two assets has a beta of .5, what are the portfolio
weights?
d. If a portfolio of the two assets has a beta of 1.80, what are the
portfolio weights? How do you interpret the weights for the two assets in
this case? Explain.
Remember to complete all parts of the questions, and report the results
of your analysis. Respond to at least two of your classmates postings
outside of your own thread.
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