Question

In Problems 21–23 below, assume the risk-free rate is 8% and the expected rate of return on the market is 18%.

A share of stock is now selling for \(100. It will pay a dividend of \)9 per share at the end of the year. Its beta is 1. What do investors expect the stock to sell for at the end of the year?

Short answer

The correct answer would be: $109

Step-by-step solution

Given Information

Stock’s Beta = 1.0

So, it’s expected rate of return E( r ) should be equal to that of the market = 18%.

P ₀ = $ 100

Dividend (D) = 9%

Solution

E ( r ) = (D + P₁ - P₀) / P₀

0.18 = (9 + P₁ - 100) / 100

P₁= $109