Question

A share of stock with a beta of 0.81 now sells for $56. Investors expect the stock to pay a year-end dividend of $4. The T-bill rate is 4%, and the market risk premium is 7%. If the stock is perceived to be fairly priced today, what must be investors’ expectation of the price of the stock at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer #1

**Correct Answer =$57.42**

Step 1 : | Calculation of expected rate of return | ||||

R = Rf+ B(Rm-Rf) | |||||

Where, | |||||

Rf = Risk Free Return | |||||

B= Beta | |||||

Rm = Market rate of return | |||||

Rm-Rf= Risk Premium | |||||

=0.04+0.81*(0.11-0.04) | |||||

=0.04+0.81*(0.07) | |||||

=9.67 % | |||||

Step 2 : | Calculation of expected price at the end of year 1 | ||||

Capital gain = $56*9.67% - $4 | |||||

=$5.4152-4 | |||||

=1.4152 | |||||

Price at the end of year = $56+1.4152 | |||||

=$57.42 | |||||

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