A share of stock is now selling for $125. It will pay a dividend of $8 per share at the end of the year. Its beta is 1. What must investors expect the stock to sell for at the end of the year? Assume the risk-free rate is 7% and the expected rate of return on the market is 19%. (Round your answer to 2 decimal places.)

Investors must pay $140.75  for the share

Explanation:

Using Miller and Modgiliani CAPM formula, the return on the stock is calculated thus:

ERi=Rf+βi(ERm−Rf)

Rf is the risk-free rate of 7%

Beta is 1

(ERm−Rf) =19%-7%=12%

ERi=7%+1(12%)

ERi=19%

the expected selling price can be computed using the below formula:

return on  investment=(expected selling price+dividend)/current price+1

return on investment is 19%

dividend $8

current price $125

expected selling price is the unknown

0.19=(expected selling price +$8)/$125+1

1.19=(expected selling price +$8)/$125

1.19*$125=expected selling price +$8

expected selling price =(1.19*$125)-$8

                                       =$140.75

the answer is account d