Suppose that the consensus forecast of security analyst of your favorite company is that earnings next year will be E1 = $5.00 per share. Suppose that the company tends to plow back 50% of its earnings and pay the rest as dividends to shareholders. The expected return on the market is 8%, the risk-free rate is 4%, and the company has a beta of 1.5.
a) What is present value of the stock price if the company will continue this payout forever (no growth)?
b) The covariance of Stock A with the market portfolio is 0.0105. What is the beta of Stock A?