Question 1 (12 marks)

Assume the expected rate of return on the market is 10% and the risk-free rate is 3%.

a. TSL stock is now selling for $50 per share. It will pay a dividend of $3 per share at the end of the year. Its beta is 1.1. What do you expect the stock to sell for at the end of the year? (3 marks)

b. Ian is buying a firm with an expected perpetual cash flow of $2,500 but is unsure of its risk. If Ian thinks the beta of the firm is 0.8, when the beta is really 1.1, how much more will he offer for the firm than it is truly worth? [Hint: Value of perpetual cash flow = CF/r] (7 marks)

c. CKG stock has an expected rate of return of 8%. What is its beta? (2 marks)