Assume that the risk-free rate of interest is 4% and the expected rate of return on the market is 16%. a share of stock sells for $63 today. it will pay a dividend of $3 per share at the end of the year. its beta is 1.1. what do investors expect the stock to sell for at the end of the year?

investors expect the stock to sell for at the end of the year is $70.83

Explanation:

Given data

risk-free rate of interest = 4%

expect rate of return = 16%

stock sells = $63

DIVIDEND = $3 Per share

beta = 1.1

to find out

investors expect the stock to sell for at the end of the year

solution

we know expected return formula = risk free interest + beta (rate of return - risk free interest )

so put all value

expected return formula = 4 + 1.1 (16 - 4 )

expected return = 4 + 1.1 (16 - 4 )

expected return is 17.2 % = .0.172

required return is here = ( dividend / stock sells ) + growth rate

put all these value we get

0.172 = 3/63  + growth rate

growth rate  =  0.172 - 0.04761

growth rate  =  0.1243

so that price at end of year is = stock sells today ( 1+ growth rate )

put all these value

so that price at end of year is = 63 ( 1+ 0.1243 )

price at end of year is = 70.83

investors expect the stock to sell for at the end of the year is $70.83

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