The risk-free rate of return, r RF , is 6%; the required rate of return on the

Question:

The risk-free rate of return, r_RF, is 6%; the required rate of return on the market, r_M, is 10%, and Upton Company’s stock has a beta coefficient of 1.5.
a. If the dividend expected during the coming year, D₁, is $2.25 and if g = a constant 5%, at what price should Upton’s stock sell?
b. Now suppose the Federal Reserve Board increases the money supply, causing the risk-free rate to drop to 5% and r_M to fall to 9%. What would happen to Upton’s price?
c. In addition to the change in part b, suppose investors’ risk aversion declines and this, combined with the decline in r_RF, causes r_M to fall to 8%. Now what is Upton’s price?
d. Suppose Upton has a change in management. The new group institutes policies that increase the expected constant growth rate from 5% to 6%. Also, the new management smoothes out fluctuations in sales and profits, causing beta to decline from 1.5 to 1.3. Assume that r_RF and r_M are equal to the values in part c. After all these changes, what is its new equilibrium price? (Note: D₁is now $2.27.)

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