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 year's earnings per share, E0, were $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? (Hint: Use four decimal places in your calculations.)

Question

Quizplus · Accepted Answer

The stock price change can be calculated using the Capital Asset Pricing Model (CAPM) and the Gordon Growth Model. An increase in beta by 50% increases the required rate of return, which decreases the stock price. The calculation shows a decrease of approximately $7.33.

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