Quick Start, Inc.is expected to pay a dividend of $1.05 next year and dividends are expected to continue their 7 percent annual growth rate.The SML has been estimated as follows:
Kⱼ = 0.08 + 0.064βⱼ
If Quick Start has a beta of 1.1, what would happen to its stock price if inflation expectations went from the current 5 percent to 8 percent?
A)decrease $8.14
B)decrease $3.55
C)decrease $3.18
D)stock price will not change

Question

Quizplus · Accepted Answer

Current kₑ = 0.08 + 0.064(1.1) = 0.1504
Current P = $1.05/(0.1504 - 0.07) = $13.06
New kₑ = 0.11 + .064(1.1) = 0.1804
New P = $1.05/(0.1804 - 0.07) = $9.51
ΔP = $3.55