Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Assume today is Dec. 31 st , 2020 and you observe that ECC Companys current stock price is $120. Analysts forecast that ECCs next dividend,
Assume today is Dec. 31st, 2020 and you observe that ECC Companys current stock price is $120. Analysts forecast that ECCs next dividend, to be paid at year-end of 2021, will be $2.50. You also find the following historic annual returns of the companys stock for the last 4 years.
2017 +50% 2018 +40% 2019 -10% 2020 -7% ECC's Returns In addition, you have the following information: risk-free rate is 2% and the expected return on the market is 9.5%. a) Based on ECC's return in the last 4 years, calculate the arithmetic average return, geometric average return, and standard deviation of ECC's stock return. b) Assume you use the arithmetic average return you calculated in part a) as an estimation of the stock's future expected return, what should ECC stock's beta be according the CAPM model? c) You are thinking of buying some ECC's stock. You assume that the arithmetic average return you calculated in part a) for ECC's stock is an accurate estimation for its future expected return. What price should you expect for its stock at the END of 2021, right after next dividend of $2.50 is paid? 2017 +50% 2018 +40% 2019 -10% 2020 -7% ECC's Returns In addition, you have the following information: risk-free rate is 2% and the expected return on the market is 9.5%. a) Based on ECC's return in the last 4 years, calculate the arithmetic average return, geometric average return, and standard deviation of ECC's stock return. b) Assume you use the arithmetic average return you calculated in part a) as an estimation of the stock's future expected return, what should ECC stock's beta be according the CAPM model? c) You are thinking of buying some ECC's stock. You assume that the arithmetic average return you calculated in part a) for ECC's stock is an accurate estimation for its future expected return. What price should you expect for its stock at the END of 2021, right after next dividend of $2.50 is paidStep by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started