Purchase Solution

Calculating stock price changes due to variations in beta

Not what you're looking for?

Ask Custom Question

Hard Hat Construction's stock is currently selling at an equilibrium price of $30 per share. The firm has been experiencing a 6 percent annual growth rate. last years earnings per share, was $4.00, and the dividend payout ratio is 40 percent. The risk-free rate is 8 percent, and the market risk premium is 5 percent. If systematic risk (beta) increases by 50 percent, and all other factors remain constant, by how much will the stock price change?

Purchase this Solution
Solution Summary

Solution depicts the steps to find out the effect of changes in beta on stock price.

Solution Preview

Last year's earnings=E=$4.00 per share
Dividend payout ratio=40%
Latest dividend=Do=E*payout ratio=4*410%=$1.60

Dividend will grow at the rate of 6% as firm is growing at the rate of 6% and is maintaining the same payout ratio.

Growth rate=g=6%
Expected dividend next ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Geometry - Real Life Application Problems

Understanding of how geometry applies to in real-world contexts

Solving quadratic inequalities

This quiz test you on how well you are familiar with solving quadratic inequalities.

Exponential Expressions

In this quiz, you will have a chance to practice basic terminology of exponential expressions and how to evaluate them.

Probability Quiz

Some questions on probability

Multiplying Complex Numbers

This is a short quiz to check your understanding of multiplication of complex numbers in rectangular form.

View More Free Quizzes
Related BrainMass Solutions

  • Please locate the Beta for the Disney Corp.

    Calculating Beta To calculate the 200-day Beta for a stock (in comparison to the S&P index), you would compute the 200 one-day percentage changes in S&P and the 200 one-day percentage changes in the stock.

  • Calculating the market price of a stock

    Here required rate on stock is changing due to changes in beta, expected market return and risk free rate. Hence the current market estimates are different in part(c) through part(e).

  • Beta of stocks

    The potential risk of losses due to a declining stock market remains. The solution analyzes the selection of stocks in a portfolio based on beta of the stocks.

  • Understanding Theoretical Stock Prices

    Answer: The current stock price is $76.28, which means that there is a difference of $76.28-$10.49=$65.79 between the stock price calculated above and the current stock price Such a difference could be due to the following: A) In calculating the rate

  • WACC & Capital Structure

    In this solution we show how to calculate the weighted average cost of capital WACC and the three methods of calculating the cost of equity on the 2011 totals for Exxon Mobil, Chevron, and Conoco-Phillips.

  • WACC, CAPM, Holding period returns

    The stock paid no dividends. The current share price is $37.53. What is the APR of your investment? The EAR? 5. Portfolio Expected Returns. You own a portfolio that has $3,400 invested in Stock A and $4,100 invested in Stock B.

  • Beta and Risk

    The potential risk of losses due to a declining stock market remains. 2) If you are relatively risk averse, would you require a higher beta stock to induce you to invest than the beta required by a person more willing to take risks?

  • Calculating Risk and Capital Using CAPM and CGM Models

    Now assume the market risk premium has increased from 7.5% to 10%; and this increase is due only to the increased risk in the market. In other words, assume krf and stock's beta remains the same for this exercise. What will the new price be?

  • CAPM Steps in Calculating Asset Beta

    107889 CAPM Steps in Calculating Asset Beta What are the steps in calculating the Asset beta in the CAPM for purposes of calculating the cost of capital for a project?

View More Related Solutions