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.

1. If the dividend expected during the coming year, D 1, is $2.00, and if g equals a constant 4%, at what price should Upton's stock 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.

2. Now, suppose the Federal Reserve Board increases the money supply, causing the risk-free rate, R F, to drop to 3% and r m to fall to 10%. What would this do to the price of Upton Company's stock?

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.