Question

A share of stock with a beta of .78 now sells for $58. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 5%, and the market risk premium is 8%

a. Suppose investors believe the stock will sell for $60 at year-end, is the stock a good or bad buy? What will investors do?

b. At what price will the stock reach an "equilibrium" at which it is perceived as fairly priced today?

Answer 1

The answer and procedures of the exercise are attached in the images below.

Explanation

Please consider the data provided by the exercise. If you have any question please write me back. All the exercises are solved in two sheets with the formulas indications.