Question

The risk-free rate of return is 2 percent, and the expected return on the market is 7.8 percent. Stock A has a beta coefficient of 1.7, an earnings and dividend growth rate of 7 percent, and a current dividend of $3.00 a share. Do not round intermediate calculations. Round your answers to the nearest cent.

If the beta coefficient falls to 1.4 and the other variables remain constant, what will be the value of the stock?

$___________

Explain why the stock’s value changes in c through e.

The increase in the return on the market ______ the required return and ______ the value of the stock.

The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to _______ .

The decrease in the beta coefficient causes the firm to become _____ risky as measured by beta, which ______ the value of the stock.

Answer 1

Cost of Equity with new beta =Risk free rate+beta*(Market Return-Risk free rate) =2%+1.4*(7.8%-2%) =10.12%
Value of stock =Dividend*(1+g)/(Cost of Equity-growth) =3*(1+7%)/(10.12%-7%) =102.88

The increase in the return on the market _increases___the required return and _decreases_____ the value of the stock.

The increase in the risk-free rate and the simultaneous increase in the return on the market cause the value of the stock to ____decrease___ .

The decrease in the beta coefficient causes the firm to become __less___ risky as measured by beta, which _increases_____ the value of the stock.