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After market close yesterday, Cisco announced their quarterly results. As a result of the news, the expected price of a share of Cisco stock in one year from now changed. The table below gives the last price the stock traded for before the market closed yesterday, the new expected price after the results were announced, and the CAPM beta for the stock.
New Expected Price in 1 Year
E(P1) CAPM Beta
Cisco $45 $50 1.2 Markets have not yet opened today. The risk-free rate is 2% and the expected return of the market portfolio is 7%. Assume Cisco does not pay dividends. Assume that the CAPM holds, and that the expected return on the market and the stock’s beta do not change.
a) What should be today’s opening price for Cisco, according to the CAPM? b) Before last night’s news, what was the expected price in one year of Cisco’s stock?
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