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1 of 2 2. Suppose IAM Appmaths paid a dividend of TL3 per share yesterday (Do = TL3). It is estimated that the company's dividend
1 of 2 2. Suppose IAM Appmaths paid a dividend of TL3 per share yesterday (Do = TL3). It is estimated that the company's dividend will grow at a rate of 20% for the next year, at 15% for the following year and at a constant rate of 4% afterwards. The company's stock has a beta of 1.5, the risk-free rate is 10%, and the return on market portfolio is 17%. a. What is your estimate of the stock's current price? (6 Pts) b. Now suppose that the Central Bank increases the money supply, causing a fall in the risk-free rate to 9% and a fall in the market return to 15%. How would this affect the price of the stock? (6 Pts) c. In addition to the change in part b, suppose investors" risk aversion declines: this fact, combined with the decline in na, causes the market return to fall to 14%. At what price would IAM Appmaths's stock now sell? (6 Pts) d. Suppose IAM Appmaths has a change in management. The new group institutes policies that increase the expected constant growth rate to 6%. Also, the new management stabilizes sales and profits and thus causes the beta coefficient to decline from 1.5 to 1.4. Assume that rap and the market return are equal to the values in part c. After all these changes, what is IAM Appmaths's new equilibrium price? (7 Pts)
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