Question

"The risk‐free interest rate on one‐year debt is 7 percent and the return on the market is expected to be 13 percent. A stock with a beta of 1.2 pays no dividends over the next year. If it is currently priced at $15.00, what will its price be at the end of the year?"

Answer 1

Price be at the end of the year = $17.13

Step-by-step explanation:

Using the capital asset pricing model we have,

`E(R) = R{_f} + \beta (R{_m} - R{_f})`

Where E(R) = Expected return on investment

R[tex]{_f}[tex] = Risk free rate of return = 7%

[tex]\beta[tex] = 1.2

[tex]R{_m}[tex] = Return on the market

Here we have

E(R) = 7% + 1.2(13 - 7)%

= 0.07 + 0.072 = 0.142

= 14.2%

Therefore price of share at year end = $15 + 14.2% = $17.13

That is current cost + expected return on this investment = $17.13