Question

A share of stock with a beta of 0.84 now sells for $69. Investors expect the

stock to pay a year-end dividend of $4. The T-bill rate is 3%, and the market risk premium is 7%.

a. Suppose investors believe the stock will sell for $71 at year-end. Calculate the opportunity cost of capital. Is the stock a good or bad buy? What will investors do? (Do not round intermediate calculations. Round your opportunity cost of capital calculation as a whole percentage rounded to 2 decimal places.)

Opportunity cost of capital _______ %

The stock is a _____ buy and the investors ______

b. At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

The risk-free rate is 5% and the expected rate of return on the market portfolio is 10%.

a. Calculate the required rate of return on a security with a beta of 1.23. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)

Required Return: ____ %

A stock with a beta of 1.3 has an expected rate of return of 16%. If the market return this year turns out to be 8 percentage points below expectations, what is your best guess as to the rate of return on the stock? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.)

Stock return: _____ %

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