A stock that currently trades at $10 has a beta of 1.1. The risk-free interest rate for the coming year is 3 percent, and the market price of risk is 7 percent.

 

(a) What should the expected return on the stock be?

 

 

(b) If the stock price is not expected to increase this year (i.e., the stock price is expected to remain unchanged), what dividend payments must investors be expecting for the coming year?

 

 

(c)  Now assume that dividends over the coming year are expected to be $0.25 per share and the stock price at the end of this year is expected to be $12. Would you recommend the purchase of this stock to your investment clients?  [Show your calculations and explain fully.]

Answer rating: 100% (QA)

a The expected return on the stock can be calculated using the capital asset pricing model CAPM ER R... View the full answer