A share of stock with a beta of .72 now sells for $58. Investors expect the stock to pay a year-end dividend of $2. The T-bill rate is 3%, and the market risk premium is 6%.
A) Suppose investors believe the stock will sell for $60 at year-end. Is the stock a good or bad buy? What will investors do?
B) At what price will the stock reach an "equilibrium" at which it is perceived as fairly priced today?