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:

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

A share of stock with a beta of 0.72 now sells for $47. Investors expect the...

A share of stock with a beta of 0.72 now sells for $47. 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%. If the stock is perceived to be fairly priced today, what must be investors’ expectation of the price of the stock at the end of the year? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

A share of stock with a beta of 0.76 now sells for $51. Investors expect the stock to pay a year-...

A share of stock with a beta of 0.76 now sells for $51. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 3%, and the market risk premium is 7%. a. Suppose investors believe the stock will sell for $53 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...

A share of stock with a beta of 0.67 now sells for $51. Investors expect the...

A share of stock with a beta of 0.67 now sells for $51. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 4%, and the market risk premium is 9%. a. Suppose investors believe the stock will sell for $53 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...

3) You expect a risk free rate of 8% and a market risk premium of 6%....

3) You expect a risk free rate of 8% and a market risk premium of 6%. You ask a stockbroker what the firm’s research department expects for stocks “U”, “N”, and “D”. The broker responds with the following information: Stock Beta Current Price Expected Price Expected Dividend U 0.70 25 27 1.00 N 1.00 40 42 1.25 D 1.15 33 40 1.00 Compute the expected & required return for these three stocks, and plot them on an SML graph. Indicate...

2. A stock has a beta of 1.35, the market risk premium is 6 percent, and...

2. A stock has a beta of 1.35, the market risk premium is 6 percent, and the risk-free rate is 3.5 percent. What is the required rate of return on this stock? Group of answer choices a. 3.50% b. 6.87% c. 11.60% d. 13.13%

Suppose stock in Warren Corporation has a beta of 0.90. The market risk premium is 6...

Suppose stock in Warren Corporation has a beta of 0.90. The market risk premium is 6 percent, and the risk-free rate is 6 percent. Warren’s last dividend was €1.20 per share, and the dividend is expected to grow at 8 percent indefinitely. The stock currently sells for €45 per share. Warren has a target debt-equity ratio of 0.50. Its cost of debt is 9 percent before taxes. Its tax rate is 21 percent. Instructions: a. What is Warren’s cost of...

Suppose stock in Warren Corporation has a beta of 0.80. The market risk premium is 6...

Suppose stock in Warren Corporation has a beta of 0.80. The market risk premium is 6 percent, and the risk-free rate is 6 percent. Warren’s last dividend was €1.20 per share, and the dividend is expected to grow at 8 percent indefinitely. The stock currently sells for €45 per share. Warren has a target debt-equity ratio of 0.50. Its cost of debt is 9 percent before taxes. Its tax rate is 21 percent. Instructions: What is Warren’s cost of equity...

The risk-free rate is 2% and the market risk premium is 3%. If stock A has...

The risk-free rate is 2% and the market risk premium is 3%. If stock A has a beta of -1.5, what is the stock's required rate of return?

A stock's beta is 5, the market risk premium is 6%, and the risk-free rate...

A stock's beta is 5, the market risk premium is 6%, and the risk-free rate is 2%. According to the CAPM, what discount rate should you use when valuing the stock? A stock's beta is 1.5, the expected market return is 6%, and the risk-free rate is 2%. According to the CAPM, what discount rate should you use when valuing the stock? You have 2 assets to choose from when forming a portfolio: the market portfolio and a risk-free...

If the market risk premium is 2%, the risk-free rate is 4.4% and the beta of...

If the market risk premium is 2%, the risk-free rate is 4.4% and the beta of a stock is 1.2, what is the expected return of the stock?

Question