Question

A share of stock is now selling for $90. It will pay a dividend of $10 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

Answer 1

Answer:

$96.20

Explanation:

A share of stock is now selling for $90. It will pay a dividend of $10 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 4% and the expected rate of return on the market is 18%

Find complete question above:

The cost of equity=risk-free rate+beta*(market return-risk-free rate)

cost of equity=4%+1*(18%-4%)=18.00%

The price of the stock today is the present value of the price in a year's time and the expected dividend.

Share price today=(dividend+future share price)/(1+r)^n

share price today=$90

dividend=$10

future share price is the unknown

r=18%

n=1( 1 year from now)

90=(10+FP)/(1+18%)^1

90=(10+FP)/1.18

90*1.18=10+FP

FVP=(90*1.18)-10=$96.20