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March 28, 2015

March 28, 2015

Posted by **Heidi** on Tuesday, October 28, 2008 at 9:34pm.

When you do yours, assume the risk-free return as 6%

Assume the expected market return 12%

The beta, dividend, and share price will come from the stock you select.

______________________________________...

Assuming the following:

Risk-Free Return = 6%

Expected market return = 12%

Beta = - 0.22 %

Dividend = .95

Share price at the beginning of the period= $53.71

Find the share price at the end of the period for the given expected value.

First, calculate the expected return on the firm’s share from CAPM:

Expected return = Risk-free rate (1 – Beta) + Beta (Expected market value rate of Return)

= 0.06 (.95 – 0.22) + 0.22 (0.12)

= 0.0438 + 0.0264

= 0.702 would make it 7%

Then, calculate the ending price that supports and 7% expected return.

For calculating the ending price, apply the net rate of return formula as under:

Expected return = [(Expected ending price + Expected dividend) / Beginning price] - 1

.07 = [P (end) + .95/53.71] -1

1.02 = [P (end) + .95] / 53.71

53.71 x 1.02 = P (end) + .95

54.78 = P (end) + .95

54.78 - .95 = P (end)

P (end) = $53.83

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