(a) An investor is considering an investment in XYZ stock. The risk-free rate of return is 0.45%, the market risk premium is 6.0% and XYZ’s beta is 0.81. Based on the CAPM, what is the investor’s required rate of return on the stock? Show all calculations. (b) XYZ’s stock is currently selling at a price of $42 a share. The investor strongly believes that a year from now the stock will be worth $43 a share. The investor also expects that XYZ will pay a dividend of $0.90 share during the coming year. If the investor buys the stock today and holds if for a year, what will her holding period return for the year be if her predictions come true? Show your work.

(a) An investor is considering an investment in XYZ stock. The risk-free rate of return is 0.45%, the market risk premium is 6.0% and XYZ’s beta is 0.81. Based on the CAPM, what is the investor’s required rate of return on the stock? Show all calculations. (b) XYZ’s stock is currently selling at a price of $42 a share. The investor strongly believes that a year from now the stock will be worth $43 a share. The investor also expects that XYZ will pay a dividend of $0.90 share during the coming year. If the investor buys the stock today and holds if for a year, what will her holding period return for the year be if her predictions come true? Show your work.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 14P

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