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Solution Library
Calculation of Forecast of Bargain Buster’s Stock Price
Question
Over the next year, expected return on the S&P 500 index (proxy for the optimal risky portfolio), the SMB portfolio, and the HML portfolio are 11%, 6%, and 3%; standard deviation of the returns on the S&P 500 is 27%; risk free return is 2%.
Assuming that the CAPM is the appropriate asset pricing model, you estimate Bargain Buster Stores’ stock beta to be 1.45.
Analysts’ consensus forecast of Bargain Buster’s stock price a year from now is $60.00 and they expect that it will pay a dividend of $1.82 per share at the end of the year. What price would you pay for it today? Explain any assumptions you make or logic that you use to arrive at your answer.
Summary: This question belongs to financial management and discuses about forecast of Bargain Buster’s stock price of a portfolio.
Total word count: 40
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