Question: Problem 6: (8 marks) You are given the following information on stock of two companies: Company A and Company B. Asset Standard deviation of returns

Problem 6: (8 marks)

You are given the following information on stock of two companies: Company A and Company B.

Asset	Standard deviation of returns	Beta	Correlation with market	Stock price based on CAPM
Company A	25%		0.1	??
Company B	25%	1.0	0.6	$15.79
Market portfolio	15%

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%.

According to CAPM what should be the price of Company A shares? (5pts)

Is there a difference between the stock price for company A and B? If so, why? (3pts)

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