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    Market Price of Stock Security

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    The market price of a security is $40.00. Its expected rate of return is 13%. The risk free rate is 7%, and the market risk premium is 8%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assuming the stock is expected to pay a constant dividend in perpetuity.

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    Solution Preview

    Since the stock pays a constant dividend in perpetuity, it is a perpetuity and the stock price is the present value of all dividends.
    For a perpetuity, present value = ...

    Solution Summary

    The solution explains how to calculate the price of a stock given a change in stock beta