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# Assume the beta coefficient for a company's stock is = 0.2, the risk-free rate of return, rRF, is 8% and the required rate of return on the market,...

Assume the beta coefficient for a company’s stock is β = 0.2, the risk-free rate of return, rRF, is 8% and the required rate of return on the market, rM, is 14%. Assume the dividend expected during the coming year is D1 = \$2.50 and the growth rate is a constant 7%. Complete parts (a) through (c) below.
a) Compute the price at which the company’s stock should sell.
b) Find the new price of the stock assuming the risk-free rate of return is 5% and the required rate of return on the market is 11%.
c) What would be needed for a stock to be in equilibrium?

SOLUTION:
a) Ke = Rf + Beta * (Rm - Rf)
Ke = 8% + 0.2 * (14% - 8%)
Ke 9.20% P₀ = D₁ / (Ke - g)
P₀ = \$2.50 / (9.20% - 7%)
P₀
b) \$113.64 Ke = Rf + Beta * (Rm - Rf)
Ke = 5% + 0.2 * (11% - 5%)...

## This question was asked on Aug 07, 2012 and answered on Aug 09, 2012.

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