The risk-free rate of return is 8 percent, the required rate of return on the market, E[Rm] is 12 percent, and Stock X has a beta coefficient of 1.4. If the dividend expected during the coming year, Di, is $2.50 and g-5%, at what 1'- (a) price should Stock X sell? (b) Now suppose the following events occur: (1) The Federal Reserve Board increases the money supply, causing the riskless rate to drop to 7 percent. (2) Investors' risk aversion declines: this fact, combined with the decline in RF, causes RM to fall to 10 percent. (3) Firm X has a change in management. The new group institutes policies that increase the growth rate to 6 percent. Also, the new management stabilizes sales and profits, and thus causes the beta coefficient to decline from 1.4 to After all these changes, what is Stock X's new equilibrium price? (Note: Di goes to $2.52.) 2. (a) Suppose Carter Chemical Company's management conducts a study and concludes that if Carter expands its consumer products division (which is less risky than its primary business, industrial chemicals), the firm's beta will decline from 1.1 to 0.9. However, consumer products have a somewhat lower profit margin, and this will cause Carter's growth rate in earnings and dividends to fall from 7 percent to 6 percent. Should management make the change? Assume the following: ERM-10%, i RF-75%; Do-S2. Assume all the facts as given in part (a), except the one about the changing beta coefficient. By how much would the beta have to decline to cause the expansion to be a good one? (Hint: set Po under the new policy equal to Po under the old one, and find the new beta that produces this equality.) (b)