What would this do to the price of the stock

Assignment Help Business Management

Reference no: EM131375836

The risk-free rate of return, r_RF, is 11 percent; the required rate of return on the market, r_M, 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 r_M 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 r_RF, causes r_M 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 r_RF and r_M are equal to the values in part c. After all these changes, what is Upton's new equilibrium price? (Note: D₁ goes to $2.27.)

Reference no: EM131375836

Questions Cloud

Effective fatality or injury investigation : Identify and discuss the basic functions commonly performed during an effective fatality or injury investigation.

What are the disadvantages of hot-water heating systems : Define hydronics. What was the common choice for hydronic piping in the past, and how is that changing?

Countertrade schemes to generate export revenues : How might a company make strategic use of countertrade schemes to generate export revenues? What are the risks associated with pursuing such a strategy?

How does a fan coil unit differ from a convector : Why is it important when working on electrical components such as pump motors to make sure that all of the water in the system has been removed?

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

Strategic competitiveness and returns on investment : Define strategic competitiveness and above-average returns. What is the relationship between strategic competitiveness and returns on investment?

Which organization will benefit more from their partnership : “When living as a refugee in Kenya, I realized soap was hard to come by, even completely nonexistent sometimes. . . . People were suffering from illness simply because they couldn ’t wash their hands.” One observer notes that the Global Soap Project ..

What are the advantages of radiant floor heating : What is the purpose of the venturi on a one-pipe venturi system, single circuit?

How is hot water controlled to a zone : How does a two-pipe system, reverse return, differ from a two-pipe system, direct return?

User Account

All Pages