Question: Assume that the risk-free rate of interest is 6% and the expected rate of return on the market is 16%.
a. A share of stock sells for $50 today. It will pay a dividend of $6 per share at the end of the year. Its beta is 1.2. What do Investors expect the stock to sell for at the end of the year?
b. I am buying a firm with an expected perpetual cash flow of $1,000 but am unsure of its risk. If I think the beta of the firm is .5, when in fact the beta is really 1, how much more will I offer for the firm than it is truly worth?
c. A stock has an expected rate of return of 4%. What is its beta?