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A share of stock with a beta of 0.67 now sells for $51. Investors expect the...

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Finance

A share of stock with a beta of 0.67 now sells for $51.Investors expect the stock to pay a year-end dividend of $3. TheT-bill rate is 4%, and the market risk premium is 9%. a. Supposeinvestors believe the stock will sell for $53 at year-end.Calculate the opportunity cost of capital. Is the stock a good orbad buy? What will investors do? (Do not round intermediatecalculations. Round your opportunity cost of capital calculation asa whole percentage rounded to 2 decimal places.) b. At what pricewill the stock reach an “equilibrium” at which it is perceived asfairly priced today? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)

Answer & Explanation Solved by verified expert
3.8 Ratings (593 Votes)
aUnder Capital Assets pricing model CAPM the expected returnie opportunity cost of capital can be calculated with followingequation whereKe Opportunity cost of capitalRf Risk free rate ie T bills    See Answer
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A share of stock with a beta of 0.67 now sells for $51.Investors expect the stock to pay a year-end dividend of $3. TheT-bill rate is 4%, and the market risk premium is 9%. a. Supposeinvestors believe the stock will sell for $53 at year-end.Calculate the opportunity cost of capital. Is the stock a good orbad buy? What will investors do? (Do not round intermediatecalculations. Round your opportunity cost of capital calculation asa whole percentage rounded to 2 decimal places.) b. At what pricewill the stock reach an “equilibrium” at which it is perceived asfairly priced today? (Do not round intermediate calculations. Roundyour answer to 2 decimal places.)

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