Consider the situation with the following initial values. The
risk-free rate of return is 3 percent, and the expected return on
the market is 8.7 percent. Stock A has a beta coefficient of 1.4, a
dividend growth rate of 5 percent, and a current dividend of $2.60
per share. The value of the stock is $45.65
currently.
A) If the expected return on the market rises to 10 percent and
the other variables remain at their initial values, what will be
the value of the stock (new value is $35). Explain
why the value of the stock changes from the original value
of $46.65.
B) If the risk-free return rises to 4.5 percent and the return
on the market rises to 10.2 percent, but all other variables remain
at their initial values, what will be the value of the stock (value
is $36.50). Explain why the value of the stock
changes from the original value of $46.65.
C) If the beta coefficient falls to 1.1 and the other variables
remain at their initial values, what will be the value of the stock
(value is $63.93). Explain why the value of the
stock changes from the original value of $46.65.