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Biotech Corporation stock had its last dividend paid at 0,80 per share and the managers of the company expect the growth rate of the firm
Biotech Corporation stock had its last dividend paid at 0,80 per share and the managers of the company expect the growth rate of the firm to be 4 percent. The market portfolio return has an annual standard deviation of 0.20. The annual risk-free return is 5% and the expected return on the market portfolio is 8%. Biotech is an all equity firm without any outstanding debt. The beta coefficient of Biotech Corporation stock is 1.3. a) What is the current stock price of Biotech Corporation? (10 marks) b) During the course of the year a rise of 1% in inflationary expectations causes the risk-free rate to drop by 1 percent and the expected return on the market portfolio to rise to 10 percent. Taking into account these changes, the expected growth rate of Biotech Corporation stock increases to 6 percent and the beta coefficient rises to 1.5. Determine the change in price per share of Biotech Corporation, assuming the stock was in equilibrium before the changes. Comment on the investment implications following the change in price. (15 marks)
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