Assume that the riskfree rate of interest is 3 and the expec

Assume that the risk-free rate of interest is 3% and the expected rate of return on the market is 16%. A share of stock sells for $70 today. It will pay a dividend of $5 per share at the end of the year. Its beta is 1.3. What do investors expect the stock to sell for at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Expected stock price

Solution

required return= risk-free rate +Beta*(MArket rate- risk-free rate )

=3+1.3*(16-3)

=19.9%

Required return=(D1/Current price)+Growth rate

0.199=(5/70)+Growth rate

Growth rate=0.199-(5/70)

=0.127571428(Approx)

We use the formula:
A=P(1+r/100)^n
where
A=future value
P=present value
r=rate of interest
n=time period.

Hence

A=$70(1+0.127571428)^1

which is equal to

=$78.93(Approx).