Question

On January 1, Coronado Inc. completed its analysis of the prospects for the Geriatric Toy Store and concluded that there was a 15-percent chance the stock price would be $130 in one year and an 85-percent chance the stock price would be $180. Six months later, Coronado Inc. revised its estimated probabilities to a 30-percent chance of a stock price of $130 and a 70 percent chance of $180. If the market agrees with Coronado Inc.’s revised probabilities, what is the expected change in stock price from January 1 to July 1? Assume the discount rate is zero. (Round answer to 2 decimal places, e.g. 15.25.)

Expected change in stock price will _______ (increase or decrease) of _________ $ .

Answer 1

Expected stock price = sum of (probability of each stock price * stock price)

Expected stock price on January 1 = (15% * $130) + (85% * $180) = $172.50

Expected stock price on July 1 = (30% * $130) + (70% * $180) = $165.00

Decrease in expected stock price =  172.50 - $165.00 = $7.50