A share of stock with a beta of 0.75 now sells for $50. Investors expect the sto

Question

A share of stock with a beta of 0.75 now sells for $50. Investors expect the stock to pay a year-end dividend of $2 The T-bill rate is 4%, and the market risk premium is 7%. a. Suppose investors believe the stock will sell for $52 at year-end. Is the stock a good or bad buy? What wil Investors do? The stock is a buy and the investors b. At what price will the stock reach an "equllibrium" at which it is percelved as fairly priced today? (Do not round Intermedlate calculatlons. Round your answer to 2 declmal places.) Stock price

Explanation / Answer

required return = 4% + 0.75*7% = 9.25%

return = (52+2)/50 - 1 = 8.00%

The stock is a bad buy and investors should not invest

b. equilibrium price = 54/1.0925 = 49.43

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