Question

Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 16%. A share of stock sells for $63 today. It will pay a dividend of $3 per share at the end of the year. Its beta is 1.1. What do investors expect the stock to sell for at the end of the year?

Answer 1

investors expect the stock to sell for at the end of the year is $70.83

Step-by-step explanation:

Given data

risk-free rate of interest = 4%

expect rate of return = 16%

stock sells = $63

DIVIDEND = $3 Per share

beta = 1.1

to find out

investors expect the stock to sell for at the end of the year

solution

we know expected return formula = risk free interest + beta (rate of return - risk free interest )

so put all value

expected return formula = 4 + 1.1 (16 - 4 )

expected return = 4 + 1.1 (16 - 4 )

expected return is 17.2 % = .0.172

required return is here = ( dividend / stock sells ) + growth rate

put all these value we get

0.172 = 3/63 + growth rate

growth rate = 0.172 - 0.04761

growth rate = 0.1243

so that price at end of year is = stock sells today ( 1+ growth rate )

put all these value

so that price at end of year is = 63 ( 1+ 0.1243 )

price at end of year is = 70.83

investors expect the stock to sell for at the end of the year is $70.83