A share of stock with a beta of .70 now sells for $60
Question
A share of stock with a beta of .70 now sells for $60. Investors expect the stock to pay a year-end dividend of
$4. The T-bill rate is 5%, and the market risk premium is 8%.
| a. | Suppose investors believe the stock will sell for $62 at year-end. Is the stock a good or bad buy? What will investors do? |
| The stock is a (Click to select)goodbad buy and the investors (Click to select)will investwill not invest. |
| 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.) |
| Stock price | $ |
References WorksheetDifficulty: IntermediateLearning Objective: 1
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