Assume the expected market risk premium is 7% and the risk-free rate is 3%.

a. AMS stock is now selling for $45 per share. It will pay a dividend of $2 per share at the end of the year. The expected price for AMS at the end of the year is $48.45. What is its beta? (3 marks)

b. Tony is buying a stock with an expected perpetual dividend of $40 but is unsure of its risk. If Tony thinks the beta of the stock is 0.8, when the beta is really 1.3, how much more will he offer for the stock than it is truly worth? [Hint: Value of perpetual cash flow = CF/r] (7 marks)