A share of stock with a beta of 0.84 now sells for $69. Investors expect the stock to pay a year-end dividend of $4. The T-bill rate is 3%, and the market risk premium is 7%.

a. Suppose investors believe the stock will sell for $71 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.)

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.)

2.

The Treasury bill rate is 5%, and the expected return on the market portfolio is 10%. According to the capital asset pricing model:

a. What is the risk premium on the market? b. What is the required return on an investment with a beta of 1.5? (Do not round intermediate calculations. Enter your answer as a percent rounded to 1 decimal place.) c. If an investment with a beta of 0.9 offers an expected return of 9.1%, does it have a positive or negative NPV? d. If the market expects a return of 11.5% from stock X, what is its beta? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

a.Market risk premium%

b.Return on investment%

c.NPV

d.Beta