Suppose it is the beginning of the year and that CRS Corporation’s current dividend is $1.25 per share it is expected to increase by 12% at the end of the year. There is 50% chance that the company’s stock price would be $100 and 50% chance that it would be $60 at the end of the year.
A. What would be the expected stock price at the end of the year?
B. If investments of equivalent risk to CRS’ stock have an expected rate of return of 8.5%, what is the most you would pay today for the CRS stock, assuming you will sell it at the end of the year?
C. What dividend yield and capital gain rate would you expect at the price estimated in (A)?