Stock and Risk Free Rate
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In Problems 16-18 below, assume the risk-free rate is 8% and the expected rate of return on the market is 18%.
16. A share of stock is now selling for $100. It will pay a dividend of $9 per share at the end of the year. Its beta is 1.0. What do investors expect the stock to sell for at the end of the year?
18. A stock has an expected return of 6%. What is its beta?
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Solution Summary
The solution explains the step-by-step calculation of the price of the stock at the end of the year and the calculation of stock beta.
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16. Using the CAPM, the expected return of the investors is
Expected return = Rf + (Rm-Rf) X beta
Expected return 8% + (18%-8%) X 1.0 = ...
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