Question

You expect a share of EconNews.Com to sell for $65 a year from now. If you are willing to pay $61.06 for one share of the stock today, you expect a dividend payment of $4, and the rate of return on safe assets is 5 percent, how much is your risk premium?

Answer 1

7.94% or 8%

Step-by-step explanation:

Rate of return is the total return percentage which a shareholder revives from investment in a particular share in the form of dividend and appreciation in stock price as well.

Dividend Income = $4

Present value of stock = Future value / ( 1 + required rate of return )

$61.06 = $65 + $4 / ( 1 + required rate of return )

$61.06 = $69 / ( 1 + required rate of return )

1 + required rate of return = $69 / $61.09

1 + required rate of return = 1.1294

Required rate of return = 1.1294 - 1

Required rate of return = 0.1294 = 12.94%

Risk Premium = Required rate of return - return on safe investment = 12.94% - 5% = 7.94%