What does it mean when a stock has a Beta of .95? The annual risk-free rate...

What does it mean when a stock has a Beta of .95?

The annual risk-free rate of return is 4%, and the investor believes that the market will rise annually at 6%. If a stock has a beta of .95 and its current dividend is $1.10, would you be interested in purchasing the stock at a price of $60.00? Why or why not? Earnings and dividends are growing annually at a rate of 4%. (Show your work for full credit.)

Explain 3 concerns with using this method of stock valuation

Solutions

Expert Solution

Using CAPM model,

Required Rate = 0.04 + 0.95(0.06 - 0.04)

Required Rate = 5.90%

Using Constant Growth Model,

Fair Price of Stock = 1.10(1.04)/(0.059 - 0.04)

Fair Price of Stock = $60.21

Yes, one will puchase the stock at $60 as it is less than fair value of stock.

jeff jeffy answered 2 years ago

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