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    Change in Stock Price

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    Company Z stock is trading at $30 per share (its equilibrium price) given that the risk free interest rate is 9% and the equilibrium risk premium on the market portfolio is 8%. The company's long run growth is expected to remain 5% per year forever. Last year's EPS were $3 and the dividend payout ratio is 50%. If beta increases by 50% by how much will the stock price change? (Assume all other factors remain constant).

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    Dividend paid last year D0= $3.00*50%=$1.50
    Required rate of return on stock re=D0*(1+g)/P0+g = 1.50*(1+5%)/30+5%=10.25%
    Using CAPM we know ...

    Solution Summary

    This solution shows step-by-step calculations to determine the change in the stock price if the beta is increased by 50%.