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15 July, 21:04

A share of stock is now selling for $125. It will pay a dividend of $8 per share at the end of the year. Its beta is 1. What must investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 7% and the expected rate of return on the market is 19%. (Round your answer to 2 decimal places.)

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  1. 15 July, 23:29
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    Investors must pay $140.75 for the share

    Explanation:

    Using Miller and Modgiliani CAPM formula, the return on the stock is calculated thus:

    ERi =Rf +βi (ERm -Rf )

    Rf is the risk-free rate of 7%

    Beta is 1

    (ERm -Rf ) = 19%-7%=12%

    ERi=7%+1 (12%)

    ERi=19%

    the expected selling price can be computed using the below formula:

    return on investment = (expected selling price+dividend) / current price+1

    return on investment is 19%

    dividend $8

    current price $125

    expected selling price is the unknown

    0.19 = (expected selling price + $8) / $125+1

    1.19 = (expected selling price + $8) / $125

    1.19*$125=expected selling price + $8

    expected selling price = (1.19*$125) - $8

    =$140.75
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