Assuming market risk premium is 9% and risk free rate is 3%.
a) What is the expected return on the market?
b) What is beta for a security that has a required rate of return of 15%?
c) If this stock is selling for $60, has an expected dividend next year of $30 and dividend is expected to grow at 2% indefinitely.
Based on CAPM, is this stock fairly priced? Does it lie above or under the SML and is it over or under priced? (Find expected return using DDM and compare it to required return based on CAPM)
d) Referring to (C) what is the equilibrium price for this stock using DDM and based on its beta calculated in (b)?