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EleoNora [17]
3 years ago
7

A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. What do in

vestors expect the stock to sell for at the end of the year?
Business
1 answer:
gladu [14]3 years ago
5 0

Answer:

$53

Explanation:

The computation of the stock sale at the end of the year is computed after calculating the required rate of return and the growth rate

The required rate of return by applying the Capital Asset Pricing model formula is

= Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 6% + 1.2 × (16% - 6%)

= 6% + 12%

= 18%

Now the growth rate is

Stock price = Dividend per share÷ (Required rate of return - growth rate)

$50 = $6 ÷ (18% - growth rate)

So, the growth rate is 6%

Now the ending stock price is

Next year dividend ÷ (Required rate of return - growth rate)

where,  

Next year dividend is  

= $6 + $6 × 6%

= $6 + 0.36

= $6.36

So,

= ($6.36) ÷ (18% - 6%)

= $53

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The question is incomplete. Here is the complete question

According to the CAPM, what is the market risk premium given an expected return on a security of 13.6%, a stock beta of 1.2, and a risk-free interest rate of 4%?

Answer:

8%

Explanation:

The expected return on security is 13.6%

The stock beta is 1.2

The risk free interest rate is 1.4

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Answer:

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