Problem 11-06

The risk-free rate of return is 3 percent, and the expected return on the market is 8.7 percent. Stock A has a beta coefficient of 1.2, an earnings and dividend growth rate of 8 percent, and a current dividend of $2.80 a share. Do not round intermediate calculations. Round your answers to the nearest cent.

a) What should be the market price of the stock?

$__________

b) If the current market price of the stock is $146.00, what should you do?

The stock ________(Should/Should not) be purchased.

c) If the expected return on the market rises to 10.5 percent and the other variables remain constant, what will be the value of the stock?

$__________

d) If the risk-free return rises to 5 percent and the return on the market rises to 11.1 percent, what will be the value of the stock?

$___________

e) If the beta coefficient falls to 1.1 and the other variables remain constant, what will be the value of the stock?

$___________

Explain why the stocks value changes in c through e.

The increase in the return on the market _______(increases/decreases) the required return and ________(increases/decreases) 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 ________(increase/decrease).

The decrease in the beta coefficient causes the firm to become -Select-lessmoreItem 9 risky as measured by beta, which ________(increases/decreases) the value of the stock.