Teslas\' shares are currently selling for $30 per share. They pay no dividends.

Question

Teslas' shares are currently selling for $30 per share. They pay no dividends. The T-Bill rate is 7% and the expected market return is 15%. The firm has a beta of 0.8.

1) What is the RRR for Tesla?

2) Given your answer to part a, what should Teslas' shares sell for a year from today?

3)Your broker has estimated that the market price for Tesla will be $42 next year. As you hold your broker in high regard and also do not believe in the Efficient Market Hypothesis, you accept her estimation. What would your economic profit/loss in percent be if purchase Tesla at $30 today and sell it for $43 in one year?

Explanation / Answer

1. required rate of return = 7% + 0.8*8% = 13.40%

2. price in one year = 30*1.134 = 34.02

3. economic profit = 43 - 34.02 = 8.98

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