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Tilda Co. stock is currently priced at $48. You expect its price in one year to be $54 and do not expect any dividends to be
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Answer #1

1.
required return=(price in one year+dividend)/price now-1=54/48-1=12.50000%

beta=(required return-risk free rate)/(market return-risk free rate)=(12.50000%-5%)/(10%-5%)=1.5

If covariance doubles, beta doubles
Hence,
required return=5%+1.5*2*(10%-5%)=20.00000%

New price=54/1.2=45

2.
It means stock is undervalued and actual return is higher than predicted by SML

3.
As it is undervalued, people will start buying and price will increase and return will decreae till it reaches required return

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