Question
uestion 4 a. Suppose you consider buying a share of stock at $65. The stock is expected to pay $5 dividends next year and you
uestion 4 a. Suppose you consider buying a share of stock at $65. The stock is expected to pay $5 dividends next year and you expect it to sell then for $71. Determine the expected return of this stock. Round your answer to 2 decimal places. [5 marks] b. Suppose the rate of return on government securities is about 4.5%, the expected rate of return on the market portfolio is 18%. According to CAPM, determine the expected return of this stock if the stock risk has been evaluated at = 0.85. Interpret your result and round your answer to 2 decimal places. [15 marks] c. With reference to the answer in (a) and (b), discuss whether the stock is overpriced or underpriced. Explain your answer. [10 marks] d. Assuming that a Stock is expected to pay a dividend of $6 in five years time, maintaining at this level of dividend forever. If the required rate of return on similar stocks is 12 per cent, determine the price of this stock. Determine the price of this stock if thereafter the dividend growth is expected to be a constant annual rate of 6 per cent forever
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