You are given the following information for company \"XYZ Corp\" and the financi

Question

You are given the following information for company "XYZ Corp" and the financial markets.

• ß of stock X = 1.4
• recent dividend = $2.00
• constant growth rate = 8%
• projected stock market return = 14%
• yield on a 10-year treasury = rRF = 6.46%

• Previously Calculated Stock Price = $23.957409 (23.96 rounded)

Question: If new information indicates that expected inflation will now be 1.5% higher (than previously expected), what is the new stock price? Hint: Calculate the new required rate of return using CAPM, then find the new stock price. Previous stock price is listed above for reference.

Explanation / Answer

If Inflation is 1.5%, new Rf is 7.96%

CAPM ret = Rf + Beta ( Rm - Rf)

= 7.96% + 1.40 ( 14% - 7.96% )

= 7.96% + 1.40 ( 6.04% )

= 7.96% + 8.46%

= 16.42%

P0 = D0(1+g) / ( Ke - g)

= $2.00 ( 1+ 0.08) / ( 0.1642 - 0.08)

= $ 2.16 / 0.0842

= 25.65

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