The CIS Corporation's stocks have a beta of 2. The risk-free rate is 7.5% and the expected return on the market portfolio is 15%. The corporation presently pays a dividend of Rs.4 per share, and investors expect it to experience a growth in dividends of 10% per annum for many years to come.
- What is the stock's required rate of return according to CAPM?
- What is the stock's present market price per share, assuming this required return?
- What would be the required rate of return and market price per share if the beta were 0.50? (Assume that the other things stay the same.)
- Explain the change in required rate of return and market price per share in part.