A share of stock with a beta of .75 now sells for $50. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 4 percent, and the market risk premium is 7 percent. If the stock is perceived to be fairly priced today, what must be investors' expectation of the price of the stock at the end of the year?
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Using the CAPM equation, the required return is
Required return = Rf + (Rm-Rf) beta
We are given
Rf = T Bill rate = 4%
(Rm-Rf) = Market risk premium = 7%
beta = ...
The solution explains how to determine the expected price at the end of the year for a stock.