Hard Hat Construction's shares is currently selling at an equilibrium price of R30 per share.The firm has been experiencing a 6 percent annual growth rate.Last year's earnings per share, E0, were R4.00, 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 share price change? (Hint: Use four decimal places in your calculations.)

Question

Quizplus · Accepted Answer

The share price change can be calculated using the Capital Asset Pricing Model (CAPM) and the Gordon Growth Model. First, calculate the original required rate of return using CAPM: Required return = Risk-free rate + Beta * Market risk premium. Then, calculate the new required return with the increased beta. Use the Gordon Growth Model to find the original and new share prices: Price = Dividend / (Required return - Growth rate). The difference between the new and original share prices gives the change in price. The correct calculation shows a decrease of approximately R7.33.

Hard Hat Construction's Shares Is Currently Selling at an Equilibrium