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TABLE 2 Risk premiums Factor sensitivities:

AAA TST

Confidence Risk 0.048 0.63 0.42

Time Horizon Risk 0.031 0.47 0.39

Inflation Risk 0.045 0.70 0.51

Business Cycle Risk 0.038 0.98 0.91

Market Timing Risk -0.018 0.05 0.21

TABLE 2 Risk premiums Factor sensitivities:

AAA TST

Confidence Risk 0.048 0.63 0.42

Time Horizon Risk 0.031 0.47 0.39

Inflation Risk 0.045 0.70 0.51

Business Cycle Risk 0.038 0.98 0.91

Market Timing Risk -0.018 0.05 0.21

The sustainable growth rates for each firm are closest ro: AAA TST

12. Johnson decides to start by estimating the value of the two stocks using the constant growth dividend discount model and estimating the required rate of returns using the capital asset pricing model (CAPM). Both firms are expected to grow at their sustainable growth rates. The estimated values are closest to: AAA TST

13. Johnson believes the estimate for TST using the constant dividend discount model (DDM) is appropriate. However, she believes that AAA is expected to grow at a higher rate of 20% for the next four years and then grow at a rate of 7% after that. Using the two-stage model, the current value of AAA is closest to:

14. After reviewing an article by Burmeister, Roll, and Ross, Johnson estimates the factor sensitivities to five factors using the Arbitrage Pricing Theory (APT) model discussed by the authors. The factor sensitivities are provided in Table 2. The required rates of return based on the APT model are closest to: AAA TST

1 5. After further consideration, Johnson feels the growth rates of AAA and TST are more likely to gradually decline over the next four years and therefore considers the H-model. In addition, parr of the high growth for AAA is due to the expected growth in the industry over the next four years, and therefore she estimates TST has a high growth rate of 15% and a low growth rate of 5%. In addition, Johnson feels confident that the required returns based on the Arbitrage Pricing Theory (APT) model are the most appropriate. The current estimated values of AAA and TST using the H-model and the APT estimates for the required rates of return are closest to:

AAA TST

16. Johnson's supervisor also requested a calculation of the justified leading P/E ratios for the two firms using the capital asset pricing model (CAPM) to estimate the required returns. Assuming a worst case scenario where the earnings and dividends will grow only at the long-term growth rate for each firm, the justified leading P/E ratios are closest to: AAA TST

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