Question

A share of stock with a beta of 0.73 now sells for $50. Investors expect the stock to pay a year-end dividend of

$4. The T-bill rate is 6%, and the market risk premium is 9%.

a. Suppose investors believe the stock will sell for $52 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.)

Stock price = ___________

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