Question

In: Finance

You find a stock priced at $27.35 with a beta of 1.5. The stock pays a...

You find a stock priced at $27.35 with a beta of 1.5. The stock pays a dividend of $1.20 and is expected to be priced at $28.50 next year. If the risk-free rate is 2% and the market risk premium is 6%, would you buy the stock?

Solutions

Expert Solution

Step-1:Calculation of required rate of return
As per Capital Asset Pricing Model,
Required rate return = Risk Free return + Beta*Market risk premium
= 2.00% + 1.5*6%
= 2.00% + 9.00%
= 11.00%
Step-2:Calculation of price of bond
Price of bond = (D1+P1)/(1+Ke)
= (1.20+28.50)/(1+0.11)
= $    26.76
Where,
D1 Dividend at the end of year 1 = $       1.20
P1 Price at the end of year 1 = $    28.50
Ke Required rate of return = 11.00%
As per dividend discount model, price of stock is the present value of dividend.
Since current price of stock is $ 27.35 which is more than $ 26.76, I would not buy the price at this price
as it is an overpriced stock.

Related Solutions

Stock A has a beta of 1.5, but Stock B has a beta of 0.5. You...
Stock A has a beta of 1.5, but Stock B has a beta of 0.5. You expect the market to increase by 7.5 percent and you could earn 2.0 percent in a risk-free asset. What is the required return for each stock? If you invest $3,500 in Stock A and $6,500 in Stock B, what is the portfolio beta?
You are considering a stock A that pays a dividend of $1. The beta coefficient of...
You are considering a stock A that pays a dividend of $1. The beta coefficient of A is 1.3. The risk free return is 6%, while the market average return is 13%. a.What is the required return for Stock A? b. If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 6%?
If you estimate the beta OLS for stock i is 1.5, the standard error is 0.3....
If you estimate the beta OLS for stock i is 1.5, the standard error is 0.3. To test the two null hypothesis:β=3.5,β=-1,can you reject these two null hypotheses at 10% significance level with the tcritical = 2.96? A. β=3.5 cannot be rejected,β=-1 can be rejected B. β=3.5 can be rejected,β=-1 cannot be rejected C. β=3.5 can be rejected,β=-1 can be rejected D. β=3.5 cannot be rejected,β=-1 cannot be rejected
If you estimate the beta OLS for stock i is 1.5, the standard error is 0.3....
If you estimate the beta OLS for stock i is 1.5, the standard error is 0.3. To test the two null hypothesis:β=3.5,β=-1,can you reject these two null hypotheses at 10% significance level with the tcritical = 2.96? A. β=3.5 cannot be rejected,β=-1 can be rejected B. β=3.5 can be rejected,β=-1 cannot be rejected C. β=3.5 can be rejected,β=-1 can be rejected D. β=3.5 cannot be rejected,β=-1 cannot be rejected
1. You are analyzing a common stock with a beta of 1.5. The risk-free rate of...
1. You are analyzing a common stock with a beta of 1.5. The risk-free rate of interest is 5 percent and the market risk premium is 10 percent. If the stock's expected return based on its market price is 19.5%, the stock is overvalued since the expected return is above the SML. the stock is undervalued since the expected return is above the SML. the stock is correctly valued since the expected return is above the SML. the stock is...
A stock has an expected return of 12.66 percent. The beta of the stock is 1.5...
A stock has an expected return of 12.66 percent. The beta of the stock is 1.5 and the risk-free rate is 5 percent. What is the market risk premium? (Answer in a percentage, but do not include the % sign and round to two decimal places, i.e., 18.35)
Stock A has a beta of 1.5 and an expected return of 10%. Stock B has...
Stock A has a beta of 1.5 and an expected return of 10%. Stock B has a beta of 1.1 and an expected return of 8%. The current market price for stock A is $20 and the current market price for stock B is $30. The expected return for the market is 7.5%. (assume the risk free asset is a T-bill). 8- What is the risk free rate? A) 0.25% B) 1.25% C) 2.00% D) 2.50% E) None of the...
Stock A has a beta of 1.5, the risk-free rate is 4% and the return on...
Stock A has a beta of 1.5, the risk-free rate is 4% and the return on the market is 9%. If inflation changes by -2%, by how much will the required return on Stock A change?
Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.5 and...
Gretta's portfolio consists of $700,000 invested in a stock that has a beta of 1.5 and $300,000 invested in a stock that has a beta of 0.8. The risk-free rate is 6% and the market risk premium is 5%. Which of the following statements is CORRECT? Answers: a. The portfolio's required return is less than 11%. b. If the risk-free rate remains unchanged but the market risk premium increases by 2%, Gretta's portfolio's required return will increase by more than...
Assume that stock J is priced at 94 shares and pays a dividend of 0.7/ share....
Assume that stock J is priced at 94 shares and pays a dividend of 0.7/ share. An investor the stock at margin 50% and borrowing the remainder from the broker at 10%.If after one year, the stock is sold at a price of $132 share, what is the return to the investment.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT