Question

A share of stock is now selling for $155. It will pay a dividend of $6 per share at the end of the year. Its beta is 1. What must investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 5% and the expected rate of return on the market is 20%.

Answer 1

Answer:

$180

Explanation:

Expected return E(r) = $\frac{(D1+ P1 -P0)}{P0}$

D1= Next year's dividend

P1 = Next year's price

P0 = Current price

Since the beta is 1, it means this stock's return = market return = 20%

E(r) = $\frac{(6+P1-155)}{155}$

0.20 = $\frac{P1-149}{155}$

Multiply both sides by 155

31 = P1-149

Add 149 on both side s to solve for P1;

31+149 = P1

180 = P1

Therefore, the stock will sell at $180