A share of stock with a beta of .65 now sells for $46. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 6%, and the market risk premium is 9%.

a)Suppose investors believe the stock will sell for $48 at year-end. Calculate the opportunity cost of capital. Is the stock a good or bad buy? What will investors do?

b) At what price will the stock reach an "equilibrium" at which it is perceived as fairly priced today?