Question

An analyst gathered the following information for a stock and market parameters: stock beta = 0.8; expected return on the Market = 12.7%; expected return on T-bills = 4.8%; current stock Price = $8.51; expected stock price in one year = $13.37; expected dividend payment next year = $1.14. Calculate the required return and expected return for this stock.

Answer 1

Given that,

stock beta = 0.8

expected return on the Market Rm = 12.7%

expected return on T-bills Rf = 4.8%

So, required return on stock using CAPM model Rs

Rs = Rf + Beta*Rm

So, Rs = 4.8 + 0.8*(12.7-4.8)

So, required return = 11.12%

current stock Price P0 = $8.51

expected stock price in one year P1 = $13.37

expected dividend payment next year D1 = $1.14

So, expected return on the stock = (P1+D1-P0)/P0 = (13.37 + 1.14 - 8.51)/8.51 = 70.51%

so, expected return for the stock = 70.51%