Question

You are trying to decide whether to purchase stock or not. The stock is currently sold...

You are trying to decide whether to purchase stock or not. The stock is currently sold for $43.54 and is expected to be $46.50 in a year. A dividend of $1.50 per share will be distributed during the year. The stock has a beta of 1.25. The risk-free rate is 3%, and the expected return on the market is 10%. Based on the information, should you buy the stock?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

CAPM Return =

= 3% + 1.25 ( 10% - 3%)

= 11.75%

Expected Return =

=

= 10.24%

When CAPM OR required Rate of Return is more than the Expected Return of the stock, the Stock is overvalued.

Overvalued securities are not a buy option. They are sold. No, we should not buy the stock.

NOTE: The answer to your question has been given below/above. If there is any query regarding the answer, please ask in the comment section. If you find the answer helpful, do upvote. Help us help you.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
You are trying to decide whether to purchase stock or not. The stock is currently sold...
You are trying to decide whether to purchase stock or not. The stock is currently sold for $43.54 and is expected to be $46.50 in a year. A dividend of $1.50 per share will be distributed during the year. The stock has a beta of 1.25. The risk-free rate is 3%, and the expected return on the market is 10%. Based on the information, should you buy the stock? Yes, because the expected return of the stock is above the...
You are trying to decide whether to purchase stock or not. The stock is currently sold...
You are trying to decide whether to purchase stock or not. The stock is currently sold for $41.54 and is expected to be $45.33 in a year. A dividend of $2.00 per share will be distributed during the year. The stock has a beta of 1.1. The risk-free rate is 3%, and the expected return on the market is 12%. Based on the information, should you buy the stock? No, because the expected return of the stock is above the...
Suppose you are considering the purchase of a stock that is currently priced to offer a...
Suppose you are considering the purchase of a stock that is currently priced to offer a dividend yield of 1.2%. This dividend yield is based on an expected dividend payment of $1.47 that is to be paid in exactly one year. If you think the stock price will rise to ​$140 per share in one year, at which time it will also pay the cash dividend of $1.47, what beta would it need to have for this expectation to be...
Suppose you are considering the purchase of a stock that is currently priced to offer a...
Suppose you are considering the purchase of a stock that is currently priced to offer a dividend yield of 1.2%. This dividend yield is based on an expected dividend payment of $1.47 that is to be paid in exactly one year. If you think the stock price will rise to ​$140 per share in one year, at which time it will also pay the cash dividend of $1.47, what beta would it need to have for this expectation to be...
You are trying to decide whether to invest in one or both of two different stocks....
You are trying to decide whether to invest in one or both of two different stocks. The market risk premium and risk-free rate are 6 percent and 4 percent respectively. Use your knowledge of the CAPM and the SML which you learnt in this course and determine whether you should invest in either, one, or both of these stocks. Provide all workings to support Beta Expected Return (%) Stock 1 0.8 7.0 Stock 2 1.2 9.5 your answer.
The stock of the MoMi? Corporation is currently trading for $40 per share. The company is...
The stock of the MoMi? Corporation is currently trading for $40 per share. The company is expected to pay dividend of $2 per share at the end of the year. The dividend is expected to grow indefinitely by 6% per year. The risk-free rate of return is 5% and the expected rate of return on the market is 9%. What is the beta of the stock?
Giant Foods is trying to decide whether or not to buy Yummy Ice Cream. Yummy is...
Giant Foods is trying to decide whether or not to buy Yummy Ice Cream. Yummy is currently financed with 35% debt and 65% equity. Giant Foods intends to finance the acquisition mainly with debt such that the debt/equity ratio will be 1:1. If Yummy’s current equity beta is 1.4 and the new cost of debt is expected to be 13%, what discount rate (WACC) should Giant Foods use to value the acquisition? Assume the risk-free rate is 3%, the corporate...
A stock just paid $2 and the stock is currently selling at $50 per share. If...
A stock just paid $2 and the stock is currently selling at $50 per share. If the beta for this stock is 1.5, risk free return 3% and market total return is 9%, what is its expected dividend yield and capital gain yield for this coming year? Assume that this stock is in a market equilibrium.
You are considering an investment in a stock, which is expected to pay a dividend of...
You are considering an investment in a stock, which is expected to pay a dividend of $1.50 a share at the end of the year (D1 = $1.50) and has a beta of 0.9. The risk-free rate is 2.6%, and the market risk premium is 6.0%. The company currently sells for $39.00 a share, and its dividend is expected to grow at some constant rate, g. Assuming the market is in equilibrium, what does the market believe will be the...
You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend...
You are considering an investment in Justus Corporation's stock, which is expected to pay a dividend of $1.50 a share at the end of the year (D1 = $1.50) and has a beta of 0.9. The risk-free rate is 4.8%, and the market risk premium is 4.5%. Justus currently sells for $35.00 a share, and its dividend is expected to grow at some constant rate, g. Assuming the market is in equilibrium, what does the market believe will be the...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT