Which equations show the role of beta in determining stock price, in other words

Question

Which equations show the role of beta in determining stock price, in other words, if you know the value of a firm's beta, how do you use that beta to estimate the firm's stock price? Which equations show the role of beta in determining stock price, in other words, if you know the value of a firm's beta, how do you use that beta to estimate the firm's stock price? Which equations show the role of beta in determining stock price, in other words, if you know the value of a firm's beta, how do you use that beta to estimate the firm's stock price?

Explanation / Answer

Stock price is generally computed with the following equation:

Stock Price = Dividends (Div) / (Expected Return (R) - Dividend Growth Rate (G))

The expected return of the stock is computed using the CAPM model as shown below:

Using the CAPM model and the following assumptions, we can compute the expected return of a stock in this CAPM example: if the risk-free rate is 3%, the beta (risk measure) of the stock is 2 and the expected market return over the period is 10%, the stock is expected to return 17% (3%+2(10%-3%)).

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