A common stock currently has a beta of 1.3, the risk-free rate is an annual rate of 6 percent, and the market return is an annual rate of 12 percent. The stock is expected to generate per-share benefitsof $5.20 during the coming period. A toxic spill results in a lawsuit and potential fines, and the beta of the stock jumps to 1.6. The new equilibrium price of the stock_________ .

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Quizplus · Accepted Answer

The new equilibrium price can be determined using the Capital Asset Pricing Model (CAPM). The required return is calculated as: Required Return = Risk-Free Rate + Beta * (Market Return - Risk-Free Rate). With the new beta of 1.6, the required return is 6% + 1.6 * (12% - 6%) = 15.6%. The price is then calculated as the expected benefits divided by the required return: $5.20 / 0.156 = $33.33.

A Common Stock Currently Has a Beta of 1