Question
Asked Feb 13, 2020
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A share of stock with a beta of 0.79 now sells for $54. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 6%, and the market risk premium is 9%. If the stock is perceived to be fairly priced today, what must be investors’ expectation of the price of the stock at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

 

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Expert Answer

Step 1

Answer:

Stock price at the end of the year is $59.08

For calculating stock price at the end of the year, we need required rate of return and growth rate.

Step 2

Calculation of required return based on CAPM model:

Finance homework question answer, step 2, image 1

Step 3

Calculation of growth rate:

Finance homework question answer, step 3, image 1

Usually, in dividend discount model, next year dividend is used to determine current stock price so the same concept will be used here, to find stock price after one year, dividend after 2 years should be used.

 

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