I need work shown for this You are given the following data: (1) The risk-free r

ID: 2758213 • Letter: I

Question

I need work shown for this

You are given the following data:

(1) The risk-free rate is 5 percent.

(2) The required return on the market is 8 percent.

(3) The expected growth rate for the firm is 4 percent.

(4) The last dividend paid was $0.80 per share.

(5) Beta is 1.3.

Now assume the following changes occur:

(1) The inflation premium drops by 1 percentage point.

(2) An increased degree of risk aversion causes the required return on the market to go to 10

percent after adjusting for the changed inflation premium.

(3) The expected growth rate increases to 6 percent.

(4) Beta rises to 1.5.

What will be the change in price per share, assuming the stock was in equilibrium before the changes?

After changes:

Risk freer rate = 5% - 1% = 4%

Required return (CAPM) = Rf+×Rp

Rf is risk free return

Rp is risk premium

= 4%+1.5×(10%-4%)

= 13%

Stock price, P0 = D1÷(r-g)

D1 is next expected dividend

r is required return

g is growth rate

= $0.80×(1+6%)/(13%-6%)

Stock price after changes = $12.11