Question

Given the following information from Ivanhoe Corporation, what price would the CAPM predict that the company’s stock will trade for one year from today? (Do not round intermediate calculations. Round final answer to 2 decimal places, e.g. 50.75.)

Risk free rate:		3.2	%
Market risk premium:		9.0	%
Beta:		0.57
Current stock price:		$67.15
Annual dividend:		$1.88

price____ I got 70.76 as the answer but it tells me I'm wrong.

Answer 1

We know that

Cost of Capital under CAPM model = Rf + Market risk premium * Beta

Here Rf = Risk free rate

Cost of Capital = 3.2% + 9% *0.57

=3.2% + 5.13%

= 8.33%

Hence required rate of return is 8.33%

Let the price after 1 year is x

Rate of return = ( Closing price + Dividend - Opening price ) / Opening price

0.0833 = ( x+$ 1.88-$ 67.15)/$ 67.15

0.0833*$ 67.15 = x-$ 65.27

$ 5.593595=x-$ 65.27

$ 5.593595+$ 65.27=x

x = $ 70.86

Hence price after 1 year is $ 70.86

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