A share of stock with a beta of .79 now sells for $61. Investors expect the stoc

Question

A share of stock with a beta of .79 now sells for $61. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 6%, and the market risk premium is 9%.

choose one:

At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A share of stock with a beta of .79 now sells for $61. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 6%, and the market risk premium is 9%.

Explanation / Answer

a. required return = 6% + 0.79*9% = 13.11%

realized return = (63+3)/61 - 1 = 8.20%

it is not a good buy

b. equilibrium price = 66/1.1311 = 58.35

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