2. Now, suppose the Federal Reserve Board increases the money supply, causing the risk-free rate, RF, to drop to 3% and r m to fall to 10%. What would this do to the price of Upton Company's stock? a. SML variables: RF Solve the SML equation to find r g. _%; I m = b. Gordon Model variables: D = $_ **Note that r is the solution to the SML equation just solved. S Solve the Gordon Model equation to find P O' %; b= %; 1 s=

2. Now, suppose the Federal Reserve Board increases the money supply, causing the risk-free rate, RF, to drop to 3% and rm to fall to 10%. What would this do to the price of Upton Company's stock? a. SML variables: RF= %;rm= %;b= Solve the SML equation to find rs. b. Gordon Model variables: D1=$;g= %;rs= % Note that rs is the solution to the SML equation just solved. Solve the Gordon Model equation to find Pn. 3. In addition to the change in Question #2, suppose investors' risk aversion declines; this fact, combined with the previous decline in RF, causes rm to fall to 8%. At what price would Upton Company's stock now sell? a. SML variables: RF= %;rm= %;b= Solve the SML equation to find rs. b. Gordon Model variables: D1=$ ; g= %;rs= % Note that rs is the solution to the SML equation just solved. Solve the Gordon Model equation to find PN. 4. Now, suppose Upton has a change in management. The new group institutes policies that increase the expected growth rate to 6%. Also, the new management stabilizes sales and profits, and thus causes the beta co-efficient to decline from 1.2 to 1.1. Assume that RF remains at 3% and rm remains at 8%. After all of these changes, what is Upton's new equilibrium price, assuming D1 increases to $2.15 ? a. SML variables: RF= %;rm= %;b= Solve the SML equation to find rs. b. Gordon Model variables: D1=$ ; g= %;rs= % Note that rs is the solution to the SML equation just solved. Solve the Gordon Model equation to find PO