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:
K_e = 0.08 + 0.064b?
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?

Question

Quizplus · Accepted Answer

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