Answered

A share of stock with a beta of 0. 75 now sells for $50. Investors expect the stock to pay a year-end dividend of $2. The t-bill rate is 4%, and the market risk premium is 7%. Suppose investors believe the stock will sell for $52 at year-end. Calculate the opportunity cost of capital. Is the stock a good or bad buy? what will investors do? at what price will the stock reach an "equilibrium" at which it is perceived as fairly priced today?.



Answer :

tutorconsortium120

What the investors will do depends on whether the actual return will be higher, lower or the same as the required return (Opportunity cost of capital) .

What is Equilibrium in business?

  • When market supply and demand are in balance, prices become steady. This is known as equilibrium. In general, a surplus of goods or services leads to lower prices, which increases demand, whereas a shortfall or undersupply raises prices, which decreases demand.
  • The holding period return, which is (earnings (dividends) + (ending stock price - beginning stock price))/beginning stock price = (2 + (52 - 50))/50 = 4/50 = 8%, can be used to determine the actual return.
  • CAPM can be used to determine the Opportunity Cost of Capital. = Risk Free Rate + beta(Market Premium) = 4% + 0.75(7%) = 9.25%
  • The stock is a bad buy since the Opportunity Cost of Capital exceeds the Actual Return on the stock.

Investors won't buy anything.

To learn more about Equilibrium in business refer to:

https://brainly.com/question/22569960

#SPJ4