Market participants use CAPM to form their expectations and require a rate of return of 13%...

Market participants use CAPM to form their expectations and require a rate of return of 13% for stock XYZ. Given the required rate of return, today the market price of XYZ is $40. Assume the company is expected to pay a dividend of $3 per share next year (which is year 1; todays is year 0) and then a constant dividend in perpetuity after that (year 2, 3, etc…).

What is the divided constant dividend the market is expecting?

After one year, the risk free rate is 7%, and the market risk premium is 8%. What will the market price of the security be if its beta doubles (and the rest is unchanged)?

Expert Solution

jeff jeffy answered 2 years ago

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