Suppose that a firm with a stock price of $80 just announced that it expects to pay a $100 per share liquidating dividend in 1 year, although the exact amount of the dividend depends on the performance of the company this year. Assume that the CAPM is a good description of stock price returns and that the stock's beta is 1.5, the market's expected return is 12%, and the risk-free rate is 5%. 

 

1) Is the stock priced correctly now? 

2) What is the alpha of the stock? 

3) What would you expect to happen to the stock price in an efficient market after the announcement? 

Answer rating: 100% (QA)

To determine if the stock is priced correctly we need to calculate the present value of the expected ... View the full answer