Stock Pricing
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The risk free rate of return, r RF, is 6 percent; the required rate of return on the market, rM is 10 percent; and Upton Company's stock has a beta coefficient of 1.5.
A. If the dividend expected during the coming year, D1, is $2.25 and if g= a constant 5 percent at what price should Upton's stock sell?
B. Now suppose the Federal Reserve Board increases the money supply, causing the risk-free rate to drop to 5% and rM to fall to 9 percent. What would happen to Upton's price?
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Solution Summary
Using CAPM and the dividend growth model, the solution finds the price of a stock under diferent scenarios.
Solution Preview
Price of stock = D1/rs - g
rs = rf + Beta (rm - rf)
A.
Rs ...
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