Stock price at the end of the year.
See attached file for full problem description.
The beta of a stock is 1.2 and at the beginning of the year is selling for $55. The expected rate of return on the market portfolio is 9%, while the risk free rate of return is 3%. The stock is expected to pay a dividend of $2 at the end of the year. If the capital market is in CAPM equilibrium, what do you expect the price of the stock to be at the end of the year?
Please see the attached file.
Step 1: Calculate the expected return on the stock using CAPM
CAPM (Capital Asset Pricing Model equation is:
r A= r f + beta x (r m - r f)
risk free rate= r f = 3% (Given)
beta of stock= = 1.2 (Given)
return on market portfolio= r m = 9% (Given)
required return on ...
The solution calculates the price of the stock at the end of the year using CAPM and Dividend Discount Model. Beta stock is examined for the beginning of the year and expected rate of return on the market portfolio. The expert provides equilibrium determination.