Question: please show hand written solution Problem 6: (8 marks) You are given the following information on stock of two companies: Company A and Company B.

please show hand written solution

Problem 6: (8 marks) You are given the following information on stock of two companies: Company A and Company B. Asset Standard deviation Beta Correlation with Stock price of returns market based on CAPM Company A 25% 0.1 ?? Company B 25% 1.0 0.6 $15.79 Market 15% portfolio Both companies, are expected to pay a dividend of $1.50 next year, and dividends are expected to stay at that level forever. Assume the risk-free rate is 4% and the market risk premium is 5.5%. a) According to CAPM what should be the price of Company A shares? (5pts) b) Is there a difference between the stock price for company A and B? If so, why? (3pts)

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