Computing Share Price in a Year
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A share of stock sells for $35 today. The beta of the stock is 1.2, expected return on the market is 12%. The stock is expected to pay a dividend of $0.80 in one year. If the risk free rate is 5.5%, what will the share price be in one year?
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Solution Summary
This solution illustrates how to compute a stock's future share price using the Capital Asset Pricing Model and Gordon Dividend Growth Model.
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1. Use the Capital Asset Pricing Model to find the required return on the stock:
Required rate of return = Risk-free rate + (Beta*(Expected market return - Risk-free rate))
Required rate of return = .055 + (1.2*(.12-.055))
Required rate of return = .055 + .078
Required rate of return = ...
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