Question

Barr Pharmaceuticals (maker of the Morning After pill) is trading currently at $61 per share.   Assume that the risk-free rate of return is 3.3% and the market risk premium is 6.9%. Analysts predict the stock will rise to $83 per share by the end of the year, at which time it will pay a $1.30 dividend, what beta would it need to have for this expectation to be consistent with the CAPM?

Answer 1

Current Stock price (P0) = $61 per share

Price by the end of the year(P1) = $ 83 per share

Dividend = $1.30

Total Expected Return =

= 38.20%

- As Expected Total Return is consistent with the CAPM, Expected return as per CAPM will be 38.20%

Expected return = Risk free return + Beta(Market risk premium)

38.20% = 3.3% + Beta(6.9%)

Beta = 5.06

So, beta it would ibe needed to have for this expectation to be consistent with the CAPM is 5.06