Problem $11-06$

The risk$-$free rate of return is $3$ percent, and the expected return on the market is $8\mathrm{.}1$ percent. Stock A has a beta coefficient of $1\mathrm{.}5,$ an earnings and dividend

growth rate of $4$ percent, and a current dividend of $$2\mathrm{.}40$ a share. Do not round intermediate calculations. Round your answers to the nearest cent.

a$.$ What should be the market price of the stock?

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b$.$ If the current market price of the stock is $$13\mathrm{.}00,$ what should you do$?$

The stock

be purchased.

c$.$ If the expected return on the market rises to $11\mathrm{.}3$ percent and the other variables remain constant, what will be the value of the stock?

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d$.$ If the risk$-$free return rises to $6$ percent and the return on the market rises to $12\mathrm{.}2$ percent, what will be the value of the stock?

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e$.$ If the beta coefficient falls to $1\mathrm{.}4$ and the other variables remain constant, what will be the value of the stock?

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f$.$ Explain why the stock's value changes in $c$ through $e.$

The increase in the return on the market

the required return and

the value of the stock.

The increase in the risk$-$free rate and the simultaneous increase in the return on the market cause the value of the stock to $-$ Select$-$ hat$(v).$

The decrease in the beta coefficient causes the firm to become

risky as measured by beta, which

the value of the stock.