Answer:
The beta of the stock is 0.25 and option C is the correct answer.
Step-by-step explanation:
The current price of a stock which pays a constant dividend can be determined using the zero growth dividend model of DDM. The formula to calculate the price under this model is,
P0 = Dividend / r
Where,
- r is the required rate of return on the stock
As we already know the value of P0 and Dividend, we can plug in these values in the formula and calculate the value of r.
80 = 2 / r
80 * r = 2
r = 2 / 80
r = 2.5% or 0.025
The required rate of return can also be calculated using the CAPM equation. The formula for r under CAPM is,
r = rRF + Beta * (rM - rRF)
Where,
- rRF is the risk free rate
- rM is the return on market
To calculate beta, we will input the values for r, rRf and rM in the CAPM equation.
Let beta be x.
0.025 = 0.01 + x * (0.07 - 0.01)
0.025 - 0.01 = x * 0.06
0.015 / 0.06 = x
x = 0.25
Thus, beta is 0.25