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Expected return and price

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Weyerhaeuser, The forest products producer, traded at $42 at the beginning of 1996. Beta services typically place its beta at 1.0 with a market risk premium of 6 percent. The risk free rate at the end of 1995 was 5.5 percent. The firm was expected to pay dividends of $1.60 per share in 1996 and 1997. Use CAPM to calculate the expected return, and at what price you expect Weyerhaeuser to sell at the end of 1997 if you forecast that it will pay no dividends?

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Solution Summary

The solution explains how to calculate the expected return on a stock and its price.

Solution Preview

Using CAPM
Required return = Rf + (Rm-Rf) beta
Required return = 5.5% + 6% X 1 ...

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