Question

A share of stock sells for $53 today. The beta of the stock is 0.7 and the expected return on the market is 16 percent. The stock is expected to pay a dividend of $1.00 in one year. If the risk-free rate is 5.2 percent, what should the share price be in one year?

Answer #1

Expected return on stock = risk free rate +(beta * (expected market return - risk free rate))

Expected return on stock = 5.2% +(0.7 * (16% - 5.2%))

Expected return on stock = 12.76%

Share price in 1 year = (current share price * (1 + expected return)) - dividend in one year

(We subtract the dividend in one year because the share price will decrease by the dividend amount after stock goes ex-dividend)

Share price in 1 year = ($53 * (1 + 12.76%)) - $1.00

Share price in 1 year = $58.76

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