A share of stock with a beta of 79 now sells for 54 Investor

A share of stock with a beta of .79 now sells for $54. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 6%, and the market risk premium is 9%. 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?

Solution

Solution:

beta= 0.79

market risk premium =9%

rusk free rate=6%

Given

54=2/(8.37-g)

8.37-g=2/54

8.37-g =0.037

g=8.37-.037

g=8.333%

we have g=8.333%=0.08333

therefore , Div2 =2(1+0.08333)

Div2 =2.1666

=2.1666/(8.37-8.333)

=$58.557

investors’ expectation of the price of the stock at the end of the year= $58.557