Stock Z Is Currently Selling for $16

question 72

Essay

Stock Z is currently selling for $16.72.It has just paid an annual dividend of $0.80 per share, which is expected to grow at 4.5% indefinitely.The risk-free rate is 6%.The expected return on the market portfolio is 14% with a standard deviation of 17%.
a)What is the expected return on Stock Z?
b)Is Stock Z overpriced, underpriced, or correctly priced if it has a beta of 0.6?
c)Is Stock Z above, below, or on the SML?
d)What is the equilibrium price of Stock Z? Assume the dividend grow rate remains at 4.5 %.

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Definitions:

Cooperative Hunting

The action of different individuals or species working together to hunt prey, increasing their success rate compared to solo efforts.

Altruism

Behavior of an individual that benefits another at its own cost; in biology, it is often discussed in the context of evolutionary theory and social animals.

Prisoner's Dilemma

A fundamental problem in game theory showing why two individuals might not cooperate, even if it is in both their best interests to do so.

Slave-making Ants

Ant species that invade the colonies of other ants, capturing and forcing the captured ants to work for them.