The risk-free rate of return, kRF, is 11 percent; the required rate of return on the market,

Question:

The risk-free rate of return, kRF, is 11 percent; the required rate of return on the market, kM, is 14 percent; and Upton Company's stock has a beta coefficient of 1.5.

a. If the dividend expected during the coming year, D1, is $2.25, and if g = a constant 5%, at what price should Upton's stock sell?

b. Now, suppose the Federal Reserve Board increases the money supply, causing the risk-free rate to drop to 9 percent and kM to fall to 12 percent. What would this do to the price of the stock?

c. In addition to the change in Part b, suppose investors' risk aversion declines; this fact, combined with the decline in kRF, causes kM to fall to 11 percent. At what price would Upton's stock sell?

d. Now, suppose Upton has a change in management. The new group institutes policies that increase the expected constant growth rate to 6 percent. Also, the new management stabilizes sales and profits, and thus causes the beta coefficient to decline from 1.5 to 1.3. Assume that kRF and kM are equal to the values in part c. After all these changes, what is Upton's new equilibrium price?

Beta Coefficient
Beta coefficient is a measure of sensitivity of a company's stock price to movement in the broad market index. It is an indicator of a stock's systematic risk which is the undiversifiable risk inherent in the whole financial system. Beta coefficient...
Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Fundamentals of Financial Management

ISBN: 978-0324272055

10th edition

Authors: Eugene F. Brigham, Joel F. Houston

Question Posted: