A share of stock with a beta of .77 now sells for $50. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 4%, and the market risk premium is 8%.
a. Suppose investors believe the stock will sell for $52 at year-end. Is the stock a good or bad buy? What will investors do?
The stock is a_______ buy and the investors_________ .
b. At what price will the stock reach an “equilibrium” at which it is perceived as fairly priced today? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Stock price $ ________