Equilibrium Stock Price - Change in Price Calculation
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Given the following:
1.Risk-free rate is 5%
2.Required return on the market is 8%
3.Expected growth rate is 4%
4.Beta is 1.3
5.Last dividend paid is $0.80 per share
Assume following changes occur:
1.Inflation premium drops by 1%
2.An increased degree of risk aversion causes the required return on the market to go to 10% after adjusting for the changed inflation premium.
3.Expected growth rate increases to 6%
4.Beta rises to 1.5
What will be change in price share, assuming stock was in equilibrium before change?
a.+$12.11
b.-$4.87
c.+$6.28
d.-$16.97
e.+$2.78
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Solution Summary
The solution shows how to calculate the change in the stock price based on the given information with calculations in excel.
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Hello!
The correct answer is b. You can find the calculations in Excel.
In order to find the equilibrium price for a stock, we must first find its required return. We do this using the CAPM formula:
k = Rf + Beta*(Rm - Rf)
where
k is the required rate of return for the stock
Rf is the risk-free ...
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