Ceejay Corporation'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 market risk (beta) increases by 50 percent, and all other factors remain constant, what will be the new stock price? (Use 4 decimal places in your calculations.)

Question

Quizplus · Accepted Answer

The correct answer is D.The new beta is 1.5 * 0.8 = 1.2. The new expected return is 8% + 1.2 * 5% = 14%. The new dividend is 40% * $4.00 * (1 + 6%) = $1.76. The new stock price is $1.76 / (14% - 6%) = $22.69.

Ceejay Corporation's Stock Is Currently Selling at an Equilibrium Price