Question

Assume that the risk-free rate of interest is 3% and the expected rate of return on the market is 15%. A share of stock sells for $69 today. It will pay a dividend of $2 per share at the end of the year. Its beta is 1.1. What do investors expect the stock to sell for at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer:

CAPM= RF+ B(RM-RF)= Required return

3+1.1(12)=16.2% is the required return according to the CAPM method

The stock is expected to return 16.2% in the form of price appreciation and dividends. In this case the dividends are expected to be 2$ and 2/69=2.89 %.

So we know that out of the 16.2 % expected return 2.89% will come from dividends and the rest by increase in stocks price, so in order to find the increase in stocks price we subtract 2.89% from 16.2% and we get 13.31%.

So the stocks price is expected to increase by 13.31%

1.1331*69= 78.18

The investors expected the stocks price to be $78.18 at the end of the year

Explanation: