Question: Continuing Example 8.5, suppose that FortuneCookie.com is expected to pay a $1.00 dividend and have a market price of $80.00 per share in one year.

Continuing Example 8.5, suppose that FortuneCookie.com is expected to pay a $1.00 dividend and have a market price of $80.00 per share in one year. The interest rate on government bonds is 6 percent per year. However, to be willing to hold a risky asset like a share of FortuneCookie.com, you require an expected return four percentage points higher than the rate paid by safe assets like government bonds (a risk premium of 4 percent). Hence you require a 10 percent expected return to hold FortuneCookie.com. What is the most you would be willing to pay for the stock now? What do you conclude about the relationship between perceived riskiness and stock prices?

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