Question

A share of stock with a beta of 0. 75 currently sells for $50. Investors expect the stock to pay a year-end dividend of $2. The 1 year t-bill currently sells for $961. 54, and the historic return on the market is 11%, the historic risk free rate is 4%. 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?.

Answer 1

Expected price next year = $62.58

Beta is 0.75, PO is $50, D1 is $2, RF is 11%, and RM is 4%.

Where,

Expected Dividend = D

Po = Price as of today.

Risk-free Rate is Rf.

Market risk premium is Rm.

g = rate of growth

Equity cost is Rf plus beta minus Rm.

Equity cost is 11% plus 0.75 and 4%.

Equity cost = 3.33%

Making use of the Dividend Discount Model to Estimate Growth Rate

(D1/P0) + g = ke

(2/50) + g = 3.33%

0.04 + g= 3.33%

g = 3%

Expected price for the following year = $2*1.033/ (0.03-0.033)

Expected price next year = $62.58

What is Expected price?

As its name suggests, predicted price level is a forecast that takes into account accurate evaluation of pertinent economic data to foretell what will happen with those goods and services in the future. Making changes to this level when new information becomes available is essential because unknowable factors may become real over time.

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