You are thinking of buying a stock priced at $100 per share. Assume that the risk-free rate is about 4.5% and the market risk premium is 6%. If you think the stock will rise to $117 per share by the end of the year, at which time it will pay a $1 dividend, what beta would it need to have for this expectation to be consistent with the CAPM

The correct answer is (e) None of the choices listed are correct.

Explanation:

Solution

Given that:

1. The Qualified dividend is the dividend taxed at capital gain tax rate and unqualified dividend taxed at individuals normal income tax rate. Therefore qualified dividend and non qualified dividend of $1500 &$500 included in gross taxable income.

2. Earned on US treasurers is exempt at state level but fully taxable at federal level. $1000 received taxable

3. State tax refund; don't report the state tax refund if didn't itemized deductions on federal tax return. Consider $1000 received as state tax refund required to be reported because of itemized deductions.

4. Section 125 of IRC specifies that cafeteria plans are exempt from calculation of gross income for federal taxation. Therefore $5000 cafeteria plan provided by employer is exempt.

5. During the year any state or local taxes paid and property taxes paid are deductible. Therefore $9000 and $3000 deductible subject to maximum $10000 of income tax and mortgage interest is $14000.

Now,

The Income is

The Salary= $200000

Add

The Qualified dividend= $1500

Non-qualified dividend =$500

Income from US treasurer $1000

State tax refund =$1000

Gross income$204000

The Less deductions.

Mortgage interest 14000

Income ans property tax is$10000

Tax able income= $ 180000

Therefore the taxable income is =$180000