Purchase Solution

# New stock price after the increase of beta.

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A stock currently trades with a beta of 1. Company management is considering a bold new venture that will greatly increase the stock's perceived risk. If beta increases to 2, would you expect the stock price to be cut in half, if other variables are held constant?

##### Solution Summary

This solution is comprised of a detailed explanation and calculation to find the new stock price after the increase of beta.

##### Solution Preview

The stock price can be determine by using constant growth method, but we need to find the required rate of return by using the beta in the following formula.

rs = rf + (rm - rf)b where rs is the stock's required rate of return
rm is the market required rate of return
rf is the risk free rate
...

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