Question

"Given the following information from Cullumber Corporation, what price would the CAPM predict that the company’s stock will trade for one year from today? (Do not round intermediate calculations. Round final answer to 2 decimal places, e.g. 50.75.) Risk free rate: 3.6 % Market risk premium: 8.6 % Beta: 0.65 Current stock price: $64.60 Annual dividend: $1.84"

Answer 1

Answer:

$68.70

Explanation:

Risk free rate: 3.6 %

Market risk premium: 8.6 %

Beta: 0.65

Current stock price: $64.60

Annual dividend: $1.84

The expected rate of return = 3.6% + 0.65*8.6%

The expected rate of return = 0.036 + 0.0559

The expected rate of return =  0.0919

The expected rate of return = 9.19%

Required return = (P1-P0+Dividends)/P0

9.19% =  [(Price + 1.84)/64.60 ] - 1

9.19% + 1 = (Price + 1.84)/64.60

64.60*(0.0919 + 1) = Price + 1.84

70.53674 = Price + 1.84

Price = 70.53674 - 1.84

Price = $68.69674

Price = $68.70