1. a. The risk-free rate of return is 8%, the required rate of return on the market, is 12%, and Stock X has a beta coefficient of 1.4. If the dividend expected during the coming year, D₁, is $2.50 and the constant growth rate, , at what price should Stock X sell?

b. Now suppose the following events occur:

(1)The Federal Reserve Board increases the money supply, causing the riskless rate to drop to 7%.

(2)Investors' risk aversion declines: this fact, combined with the decline in , causes to fall to 10%.

(3)Firm X has a change in management. The new group institutes policies that increase the growth rate to 6%. Also, the new management stabilizes sales and profits, and thus causes the beta coefficient to decline from 1.4 to 1.1.

(4)After all these changes, what is Stock X's new equilibrium price? (Note: D₁ goes to $2.52.)