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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.
- 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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