(Stock expected price) A stock with a beta of 0.75 now sells for $50. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 2%, and the market risk premium is 5%.

a. What is the investors’ expectation of the price of the stock at the end of the year?

b. Suppose investors actually believe the stock will sell for $54 at yearend. Is the stock a good or bad buy? What will investors do? At what point will the stock reach an equilibrium at which it again is perceived as fairly priced?