Question
Quervate Inc. stock has a beta of 1.5. With virtually no inflation, the risk-free rate of return is 3.5% and the market risk premium is
Quervate Inc. stock has a beta of 1.5. With virtually no inflation, the risk-free rate of return is 3.5% and the market risk premium is 6%. Quervate Inc. stock is a constant growth stock with a dividend growth rate of 3% per year forever. The stock paid a dividend of $2 just yesterday.
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a) What is the required rate of return on Quervate Inc. stock?
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b) What is the price of Quervate Inc. stock today?
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c) Today, the Federal Reserve announced the following changes to economy-wide indicators: They assessed a decrease in investor risk aversion so that investors now demanded 1.5% less in risk premium than before. Also, inflation is expected to increase by 0.8%. Neither Quervate Inc. beta nor the growth rate in their dividends is expected to change. What will be the new price of Quervate Inc. stock today after the Fed announcement?
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Essentials of Managerial Finance
Authors: Scott Besley, Eugene F. Brigham
14th edition
324422709, 324422702, 978-0324422702
