Question
The beta of common stock of Yale Corp. is 1.4, the risk free rate of interest is 3.0% per annum while the expected rate of
The beta of common stock of Yale Corp. is 1.4, the risk free rate of interest is 3.0% per annum while the expected rate of return on the market portfolio is 8% per annum. Assume that the market participants expect that York Corp. will pay $1.5 as dividends for each share of its stock at the end of the current year. Also, they expect that the price of the stock will be $42.5 per share at the end of the year. Answer the following questions: (i) Find the current reward-to-risk ratio of: (a) the market portfolio, and (b) the common stock of Yale Corp. (ii) Find the current equilibrium price per share of the common stock. (iii) What will happen if the current price is not what you found in (ii), but it is $38.0 per share? Also, show the disequilibrium situation, using the security market line
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