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