Question

A share of stock with a beta of 0.76 now sells for $51. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 3%, and the market risk premium is 6%. If the stock is perceived to be fairly priced today, what must be investors’ expectation of the price of the stock at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer:

Expected Stock price in a year: $ 54.86

Explanation:

We will calculate the Capita Assets Pricing Model to determiante the rate of cost of capital:

$Ke= r_f + \beta (r_m-r_f)$  

risk free 0.03 (T-bill rate)

premium market = (market rate - risk free) = 0.06

beta(non diversifiable risk)= 0.76

$Ke= 0.03 + 0.76 (0.06)$  

Ke 0.07560 = 7.56%

The stock price will grow according to the cost of capital:

51 x ( 1 + 7.56%) = 54,8556‬ = $ 54.86