Purchase Solution

Systematic risk and stock price

Not what you're looking for?

Ask Custom Question

AKA's stock is currently selling for $11.44. This year the firm had earnings per share of $2.80 and the current dividend is $0.68. Earnings are expected to grow 7% a year in the foreseeable future. The risk-free rate is 10 percent and the expected market return is 14.2 percent. What will be the effect on the price of AKAs' stock if systematic risk increases by 40 percent, all other factors remaining constant?
an increase of $1.14
a decrease of $0.40
a decrease of $1.99
cannot determine from the given data.

Purchase this Solution
Solution Summary

The solution shows how the effect on the stock price if systematic risk increases keeping all other factors remaining constant.

Solution Preview

D0=$0.68
g=7%
P0=$11.44
First calculate the expected return on the stock
r=D0*(1+g)/Po+g=0.68*(1+7%)/11.44+7%=13.36%

Now calculate ...

Purchase this Solution
Free BrainMass Quizzes
Lean your Process

This quiz will help you understand the basic concepts of Lean.

Team Development Strategies

This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.

Motivation

This tests some key elements of major motivation theories.

Change and Resistance within Organizations

This quiz intended to help students understand change and resistance in organizations

Basics of corporate finance

These questions will test you on your knowledge of finance.

View More Free Quizzes
Related BrainMass Solutions

  • CAPM

    The systematic risk cannot be diversified away. The nonsystematic risk is measured by the standard deviation and the systematic risk is measured by the beta of the stock.

  • Portfolio Risk Management, Systematic Risk and Unsystematic Risk

    The solution provides an explanation of Systematic Risk and Unsystematic Risk by comparing a 1-stock portfolio and diversified portfolio.

  • Hedge Against Systematic Risk

    507761 Hedge Against Systematic Risk I have an expected cash flow of $1,000 in one year. 1.2 is the beta for the common stock and 1.2 is also the beta of my cash flow. The risk-free rate is 4% and the market index has a 5% risk premium.

  • Cost of equity for American Express

    j = systematic risk of the asset vis-à-vis the market RM = expected required rate of return of the market portfolio Third, CAPM needs several inputs and they are as follows: 1. Risk free rate = ??

  • Calculating Risk Using Beta & Standard Deviation of Return

    The risk of holding a stock has two components- systematic risk and unsystematic (unique) risk Thus, Total risk = Systematic risk + Unsystematic risk Systematic risk, also called market risk, influences a large number

  • Abnormal rate of return; systematic risk measure

    Abnormal return = Rit - beta X Rmt = 9.8% - 8%X1.1 =1.0% The solution explains how to calculate the abnormal rate of return and systematic risk measure

  • Measures to reduce risks in international porfolios

    This is also known as "un-diversifiable risk" or "market risk." Hence systematic risk represents the uncertainty related to overall market.

  • Firm-specific risk & systematic (market) risk

    Therefore Stock B has a greater systematic (market) risk. Using regression of excess return on stock on market premium, the stock with higher firm-specific risk and greater systematic (market) risk are identified.

  • Business risk, financial risk, and portfolio risk

    Portfolio risk First, let's take a look at the risk composition of the portfolios: Total Risk = Systematic risk + non-Systematic risk The Systematic risk is the risk intrinsic to the stock market, such as business cycle, political environment,

View More Related Solutions