Upton Company is a technology firm engaged in the manufacture and sale of innovative computer hardware components. Assume the following:

*The risk-free rate of return, R F, is 5%.

*The required rate of return on the market, r m, is 12%.

*The Upton Company's stock has a beta co-efficient of 1.2.

3. Suppose investors' risk aversion declines; this fact, combined with the previous decline in R F, causes r m to fall to 8%. At what price would Upton Company's stock now sell? a. SML variables: R F = _________%; r m = __________%; b = __________. Solve the SML equation to find r s. b. Gordon Model variables: D 1 = $ __________; g = _________%; r s = __________%** **Note that r s is the solution to the SML equation just solved. Solve the Gordon Model equation to find P o.

4. Now, suppose Upton has a change in management. The new group institutes policies that increase the expected growth rate to 6%. Also, the new management stabilizes sales and profits, and thus causes the beta co-efficient to decline from 1.2 to 1.1. Assume that R F remains at 3% and r m remains at 8%. After all of these changes, what is Upton's new equilibrium price, assuming D 1 increases to $2.15? a. SML variables: R F = _________%; r m = __________%; b = __________. Solve the SML equation to find r s. b. Gordon Model variables: D 1 = $ __________; g = _________%; r s = __________%** **Note that r s is the solution to the SML equation just solved. Solve the Gordon Model equation to find P o.