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A share of stock sells for $53 today. The beta of the stock is 1.2, and the expected return on the market is 12%. The stock is expected to pay a dividend of $1.10 in one year. If the risk- free rate is 5.5%, what will the share price be in one year?

Required return = 0.055 + [1.2 (0.12 - 0.055)]
0.055 + (1.2 * 0.065)
0.055 + 0.078
0.133

Future Stock Price = 1.10 / 0.133 = $8.27

 

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