A share of stock with a beta of 0.72 now sells for $58. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 3%, and the market risk premium is 6%. a. Suppose investors beli...

A share of stock with a beta of 0.72 now sells for $58. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 3%, and the market risk premium is 6%.

a. Suppose investors believe the stock will sell for $60 at year-end. Calculate the opportunity cost of capital. Is the stock a good or bad buy? What will investors do? (Do not round intermediate calculations. Round your opportunity cost of capital calculation as a whole percentage rounded to 2 decimal places.)

Opportunity cost of capital: %

The stock is a (good/bad) buy and the investors will (not) invest.

b. At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Stock Price:

Solutions

Expert Solution

1.
Opportunity cost of capital=3%+0.72*6%=7.32%

Price should be=(2+60)/(1+7.32%)=57.7711517

The stock is overvalued and is a bad buy and investors will not invest

2.
Equilibrium price=57.7711517

jeff jeffy answered 2 years ago

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