Nantes Corporation%u2019s common stock sells for $51.25 a share and its current

Question

Nantes Corporation%u2019s common stock sells for $51.25 a share and its current annual dividend is $5. The beta of this stock is 1.3. It has shown 3% annual growth in dividends for many years. The current riskless rate is 4%. Today, the analysts downgraded the stock from %u2018buy%u2019 to %u2018hold%u2019. In response to the news, the stock dropped in price by $1.25. Assume that the stock will maintain the growth in dividends.

(A) Find the new beta of the stock.

(B) Expected return of the market.

Explanation / Answer

Price is 51.25= 5 * (1.03/(r-.03)

Solving for r we get .1305

.1305= .04 +1.3 (r-.04)

.1096 is expected return of the market

New r is

50 = 5*1.03/r-.03

r=..1330

New beta is .04 +x(.1096-.04)= .1330= 1.336

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