X company has a beta of 0.86 . The risk-free interest rate is 1.5% and the expected rate of return on the market is 9% p.a. X had a closing price today of $2.45. It paid its last dividend yesterday and is expected to pay a dividend of $0.18 in exactly one years time.

1. What do investors expect the stock to sell for at the end of the year (one year from now) if they believe in the CAPM? According to this valuation is it under, over, or fairly valued?

2. If dividends will grow at 1.3% for the next three years, after which they are expected to grow at 3.4% forever. If the required cost of equity for the firm is 9.5%, in the absence of any debt, what is the current value of the firm according to the two-stage DDM?

3. What does the beta of 0.86 tell you about the sensitivity?

4.Give an example of a defensive and a cyclical stock. What kinds of betas would you expect for these firms, why?