A share of stock with a beta of .79 now sells for $61. Investors expect the stock to pay a year-end dividend of $3. The T-bill rate is 6%, and the market risk premium is 9%.
a. Suppose investors believe the stock will sell for $63 at year-end. Is the stock a good or bad buy? What will investors do?
The stock is a good/bad buy and the investors will invest/will not invest.
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 $ ________