Question
High Energy (HE) Company recently paid a $2 per share dividend, which is expected to grow at a constant rate forever. HEs stock, which has
High Energy (HE) Company recently paid a $2 per share dividend, which is expected to grow at a constant rate forever. HEs stock, which has a beta coefficient equal to 1.1, is selling for $37.50 per share. Currently, the risk-free rate of return is 4 percent and the return on an average stock is 10 percent. If HEs stock is selling at its equilibrium price, what is its growth rate?
In addition to the above, can you please answer the following and show how to plot the tornado diagram requested?
(a) change HEs stock beta coefficient to 0.275 and 1.925 respectively and calculate a new growth rate.
(b.) Change the value of the risk-free rate of return to 1% and 7% respectively and calculate a new growth rate.
(c.) Change the return on an average stock to 2.5% and 17.5% respectively and calculate a new growth rate.
Plot a tornado diagram showing the effect of changes in HEs stock beta, risk-free rate of return and return on an average stock on growth rate. Which factor has most influence on the growth rate?
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