A share of stock with a beta of 0.78 currently sells for $53. Investors expect the stock to pay a year-end dividend of $5. The T-bill rate is 5%, and the market risk premium is 8%. If the stock is perceived to be fairly priced today, what must be investors’ expectation of the price of the stock at the end of the year?
Added by Charles A.
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The formula for CAPM is: \[ \text{Expected Return} = \text{Risk-Free Rate} + \beta \times \text{Market Risk Premium} \] Given: - Risk-Free Rate (T-bill rate) = 5% or 0.05 - Beta = 0.78 - Market Risk Premium = 8% or 0.08 Substituting the values into the Show more…
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