Given the following information:
- Current stock price $35
- Stock beta: 2
- Risk-free rate: 4%
- Market risk premium: 6%
- Expected dividend, D1: $3.00
- Expected long-run growth rate of dividends: 6%
- What is the required return on this stock? (hint: use CAPM)
- What is the expected return on this stock, given its current price?
- What is the fair price of the stock?
- Is this stock fairly valued, overvalued, or undervalued?
- Suppose after one year the dividend is $2.50 and the price is $29.00. What is the rate of return on an investment in this stock?