Assume that Lama's stock has a beta of 1.6 while the risk-free rate is 10% and the mean return on the market is 15%.
a. If the dividend expected during the coming year is $2.50 and the growth rate is a constant 5%, what is the equilibrium price for Lana's stock?
b. Now suppose the Federal Reserve Board increases the money supply causing the risk-free rate to drop to 9% holding everything else constant, how would Lana's stock be affected?
c. In addition to the change in part(b), suppose investors' risk aversion declines; this fact combined with the decline in the risk-free rate causes the market return to fall to 13%, what should the price of Lana's stock now be?
d. Now suppose Lama has a change in management. The new team institutes policies that increase the growth rate to 6% as well as enhance revenues and profits so that the beta coefficient declines from 1.6 to 1.3. After implementing these changes and assuming that the expected dividend now increases to $2.52, what impact would this have on Lana's share?
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