Question

You are thinking of buying a stock priced at $104

per share. Assume that the? risk-free rate is about 5.2%

and the market risk premium is 6.4%.

If you think the stock will rise to $123

per share by the end of the? year, at which time it will pay a $3.04

?dividend, what beta would it need to have for this expectation to be consistent with the? CAPM?

Answer 1

The growth rate of the stock = ( 100 * 19) $\div$ 104

Growth rate of the stock = 18.27%

Price growth rate and stock return are related as follows

Price = d $\div$ (r-g)

$ 123 = $ 3.04 $\div$ ( r - 0.1827)

Stock return = 20.74%

According to CAPM

R_e = R_f + Beta ( R_m - R_f )

20.74% = 5.2% + Beta ( 6.4% - 5.2%)

Beta = 12.95