A share of stock is now selling for $105. It will pay a dividend of $7...
A share of stock is now selling for $105. It will pay a dividend of $7 per share at the end of the year. Its beta is 1. What must investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 7% and the expected rate of return on the market is 16%.
Homework Answers
Required return=risk free rate+beta*(market rate-risk free rate)
=7+1*(16-7)
=16%
Required return=(D1/Current price)+Growth rate
0.16=(7/105)+Growth rate
Growth rate=0.16-(7/105)
=0.093(Approx).
Expected price=Current price*(1+Growth rate)
=105*(1+0.093)
=$114.8
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