Question

3. A share of stock with a beta of 0.69 now sells for $50. Investors expect the stock to pay a year-end dividend of $4. The T-bill rate is 6%, and the market risk premium is 9%. a. Suppose investors believe the stock will sell for $52 at year-end. Calculate the opportunity cost of capital. Is the stock a good or bad buy? What will investors do? (Do not round intermediate calculations. Round your opportunity cost of capital calculation as a percentage rounded to 2 decimal places.) b. At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

4. A stock with a beta of 0.5 has an expected rate of return of 10%. If the market return this year turns out to be 9 percentage points below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

Answer 1

4)

beta = 0.5

expected rate of return = 10%

market return = 9%(below expectations)

Rate of return on the stock = Expected rate of return - Market return*beta

= 10% - 9%*0.5

Rate of return on the stock = 5.5%