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PSYCHO15rus [73]
3 years ago
11

Assume the risk-free rate is 8% and the expected rate of return on the market is 18%. A share of stock is now selling for $100.

It will pay a dividend of $9 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
Business
1 answer:
Lelu [443]3 years ago
8 0

The price of the investors can expect the stock to be sold at the end of the year is $109.

The price of the investors can expect the stock to be sold at the end of the year can be determined using this formula:

Stock price = d1 / (r - g)

d1 = next dividend to be paid = $9

r = cost of equity

g = dividend growth rate

The cost of equity would be determined using the capital asset pricing model:

Risk free rate + beta(market rate of return - risk free rate)

8% + 1(18% - 8%) = 18%

The dividend growth rate can be determined using this equation:

100 = $9 /  ( 18% - g)

g = 9%

Stock price = $9(1 + 0.9)  / (0.18 - 0.09)  

9.81 / 0.09 = $109

A similar question was answered here: brainly.com/question/19922920?referrer=searchResults

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Answer:

a. $187.20.

b. $202.48.

c. $217.43.

Explanation:

Please find the below for detailed explanations and calculations:

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