Question

A share of stock is now selling for $75. It will pay a dividend of $6 per share at the end of the year. Its beta is 1. What do 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 13%. (Round your answer to 2 decimal places.)

Answer 1

Answer:

Sell Price= $1044

Explanation:

Equity Risk Premium = Market Return - Risk Free Rate

= 13 - 5

= 8%

Risk Free Rate = 5%

Beta = 1  

Expected Return on stock = Risk-free rate + Equity risk premium * Beta for stock

= 5 + 1*8 = 13%

Current Price = Present Value of Future Payments

75 = 6*(1+i)^-1 + Sell Price*(1+i)^-1 , where i=13%

Sell Price = 74.572/0.0714

Sell Price= $1,044

Answer 2

Answer:

$80.31

Explanation:

since the stock's beta = 1, its required rate of return = market rate of return, since the stock's risk is identical to the market's risk.

price of the stock in 1 year = current price + present value of future dividend

• present value of the dividend = $6 / (1 + RRR) = $6 / (1 + 13%) = $5.31
• current price = $75

price of the stock in one year = $75 + $5.31 = $80.31