Question

Suppose a share of stock is selling for $100. It plans to pay cash dividend of...

Suppose a share of stock is selling for $100. It plans to pay cash dividend of $1 per share at the end of this year. Its beta is 1. What price will investors expect the stock to sell for at the end of the year? (the risk-free rate is 4% and the expected rate of return on the market is 8%). PLEASE SHOW ALL STEPS

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Answer #1

The price is computed as shown below:

The required rate of return is computed as follows:

= risk free rate + beta x (return on market - risk free rate)

= 0.04 + 1 (0.08 - 0.04)

= 8% or 0.08

Required rate of return = (Price at the end of the year - current price + dividend) / current price

0.08 = (Price at the end of year - $ 100 + $ 1) / $ 100

$ 8 = Price at the end of year - $ 99

Price at the end of year = $ 107

Feel free to ask in case of any query relating to this question

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