13) (worth 13 points): Compute today\'s price of ONE Share in a Natural Gas Inve

Question

13) (worth 13 points): Compute today's price of ONE Share in a Natural Gas Investment Fund that is investing in a natural gas well located in Oil City, PA. This well is the only asset in the Fund's portfolio. Use the CAPM model and the following data 10%-risk-free rate (one-year investment holding period) 17%-expected one-year rate of return on the market portfolio (one-year holding period) 0.6 = Beta of the Natural Gas well $10 million = expected value of the well one year from today 100, 000 shares = number of shares owned by investors in the Natural Gas Fund · · · · HINT: Suppose an asset is purchased today at price (P) and sold one year later for price (Q). According to CAPM, the required rate of return (denoted r) on the asset is: r = (Q-P/P

Explanation / Answer

Expected return on stock = Rf + Beta * (Rm-Rf)

= 10%+ 0.6*(17%-10%)

= 14.2%

Value of the assets (Q) = $10 million

Since r= Q-P/ P

14.2%= (10-P)/P

0.142P= 10- P

1.142P = 10

P =

Price of 1 share = 8756567.43/ 100000

= $87.57

$8756567.43

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