A share of stock with a beta of 0.8 currently sells for $50. Investors expect the stock to pay a year-end dividend of $5. The T-bill rate is 1%, and the market risk premium is 6%. If the stock is perceived to be fairly priced today, what much be investors' expectation of the price of the stock at the end of the year? $ Hint: [CAPM] Expected Return (R) = R₁ + Beta*Market Risk Premium; Expected Return (R) = Dividend Yield + Capital Gains Yield, where dividend yield= D₁/Po and capital gains yield = (P₁-Po)/Po

A share of stock with a beta of 0.8 currently sells for $50. Investors expect the stock to pay a year-end dividend of $5. The T-bill rate is 1%, and the market risk premium is 6%. If the stock is perceived to be fairly priced today, what much be investors' expectation of the price of the stock at the end of the year? $ Hint: [CAPM] Expected Return (R) = R₁ + Beta*Market Risk Premium; Expected Return (R) = Dividend Yield + Capital Gains Yield, where dividend yield= D₁/Po and capital gains yield = (P₁-Po)/Po

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What is the risk- neutral probability p of that the stock price will be $26? O 0.4 O 0.6 O 0.7 O None of these O 0.5 ◄ Previous Next ▸
The market premium, E(RM)−rfis estimated to be 8% per annum, while the risk-free return (rf) is 2.5%. What is the expected return of stock KO if it's beta estimate is βKO=0.55 ? Enter rate in decimal form, rounded to the fourth digit, as in "0.1234"
2. Distribution of Stock Prices Consider a stock whose current stock price is $250 and its volatility is 20%. The risk-free interest rate is 3% per annum. The future stock price is log-normally distributed. Risk-averse investors require the stock return to be 10% per annum. (a) What is the risk-neutral probability that stock price in year 2 is higher than $300? (b) What is the real probability that stock price in year 2 is higher than $300?
A stock is expected to pay a dividend of $1.50 at the end of the year (i.e., D1 = $1.50), and it should continue to grow at a constant rate of 3% a year. If its required return is 12%, what is the stock's expected price 4 years from today? Do not round intermediate calculations. Round your answer to the nearest cent. $
1. Risk and return The stock of Hawkeye Corporation (HC) currently trades for $100. One year from now the stock price is either $75 with a 35% chance, $100 with a 10% chance, or $120 with a 55% chance. Determine the three possible end-of-year returns and then find expected return, variance and volatility of HC stock. Prob. 35% 10% 55% Value $75 $100 $120 Return tot I
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Blast! stock has a beta of 1.4 and is currently selling for $16. Your DCF analysis indicates that Blast! will trade at $18.5 a year from today and you expect that the company will pay a dividend of $1 for the year. If the risk-free rate is 0.05, and the market risk premium is 0.1, what is the alpha of this stock?
2) Suppose that the price of a non-dividend-paying stock is $32, its volatility is 30%, and the risk-free rate for all maturities is 5% per annum. Provide a table showing the relationship between profit and final stock price for a bull spread using European put options with strike prices of $25 and S$30 and a maturity of one year. Ignore the impact of time value of money.
9. A common stock offers dividend of $2 next period and its price is $30 next period. Suppose that the covariance of this stock and market is 24, market average return is 18% and market standard deviation is 4%, and the risk-free interest rate is 5%. What is proper discount rate for this stock? What is the value of this stock today? Now assume that investors will hold this stock into the indefinite future. The growth rate of dividends is 8%. Stockholders’ desired discount rate is 15%. What is the implied fair price of this stock?
Thecovarianceofthemarket'sreturnwithaStockA'sreturnis0.003andthestandarddeviation of the market's return is 0.05. Stock A's beta is ________. The risk free rate is 6% and the expected market return is 15%. Stock A's current price is $25 and will pay a $1 dividend at the end of the year. If the stock is priced at $30 at year-end, it is _______. a) 1.2; underpriced, so buy it. b) 1.5; underpriced, so buy it. c) I .2; overpriced, so sell it. d) 1.5; overpriced, so sell it. e) None of the above
HEJO company has the current stock price of $20 today. Use a 1 step binomial tree to estimate the price of a oneyear call on thisstock. Assume the price can increase or decrease by 10% in in the next year with equal likelihood. Risk free rate is 2%, the strike is $21. A. Find the hedge ratio(H), (make sure have the correct sign, this will be written out as a decimal Answer: 0.25 B) Find the call's value or price today Answer: .58 C) Using the above information to price a put using call parity. Answer: 1.17 Please explain without using excel.
1. You consider buying a share of stock at a price of $25. The stock is expected to pay a dividend of $1.50 next year, and your advisory service tells you that you can expect to sell the stock in 1 year for $30. The stock's beta is 1.1, rf is 6%, and market risk premium is 10%. What is the stock's alpha?

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