The market price of a security is $44. Its expected rate of return is 7%. The ri
ID: 2757934 • Letter: T
Question
The market price of a security is $44. Its expected rate of return is 7%. The risk-free rate is 4%, and the market risk premium is 7%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity. (Round your answer to 2 decimal places.)
The market price of a security is $44. Its expected rate of return is 7%. The risk-free rate is 4%, and the market risk premium is 7%. What will the market price of the security be if its beta doubles (and all other variables remain unchanged)? Assume the stock is expected to pay a constant dividend in perpetuity. (Round your answer to 2 decimal places.)
Explanation / Answer
Mps = dividend / ke , ke = cost of equity
Given values are,
44 = dividend /7%
Dividend = $3.08
While, ke = 7% , Rf = 4%, premium = 7%
Capm model, ke =Rf + beta × pemium
7%= 4% + beta ×7%
Beta = .429
If beta is doubled , .429 × 2 = .858
Ke = 4% + .858 × 7%
= 10%
Mps = dividend / ke
= 3.08/ 10%
$ 30.8 or $31
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.