Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

A share of stock with a beta of 0.78 now sells for $58. Investors expect the stock to pay a year-end dividend of $2. The

A share of stock with a beta of 0.78 now sells for $58. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 5%, and the market risk premium is 8%.

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 percentage rounded to 2 decimal places.)

Opportunity cost of capital %
The stock is a buy and the investors

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:

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance

Authors: Jane King, Mary Carey

2nd Edition

0198748779, 9780198748779

More Books

Students also viewed these Finance questions