# Required rate of return on stocks C & D; what is the equilibrium price for stock C.

Please help with the following problems.

The beta coefficient for stock C is bC= .4, whereas that for stock D is bD= -.5. Stock D has a negative indicating that its rate of return rises whenever returns on most other stocks fall.

1. If the risk free rate is 9 percent and the expected rate of return on an average stock is 13 percent, what are the required rates of return on stocks C & D?

2. For stock C, suppose the current price Po is $25; the next expected dividend D1 is $1.50 and the stock's expected constant growth rate is 4 percent. Is the stock in equilibrium? What would happen if the stock was in equilibrium?

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#### Solution Preview

1.If the risk free rate is 9 percent and the expected rate of return on an average stock is 13 percent, what are the required rates of return on stocks C & D?

this is a question of CAPM: R = R(risk free) + ...

#### Solution Summary

This posting helps with finance-related problems on capital budgeting. In a non-excel format, the calculations and formulas are clearly shown and the answers are computed.