CareMed stock has a beta of 1.5. With virtually no inflation, the risk-free rate of return is
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CareMed stock has a beta of 1.5. With virtually no inflation, the risk-free rate of return is 3.5% and the market risk premium is 6%. Care Med stock is a constant growth stock with a dividend growth rate of 3% per year forever. The stock paid a dividend of $2 just yesterday. a) What is the required rate of return on Care Med stock? b) What is the price of Care Med stock today? c) Today, the Federal Reserve announced the following changes to economy-wide indicators: They assessed a decrease in investor risk aversion so that investors now demanded 1.5% less in risk premium than before. Also, inflation is expected to increase by 0.8%. Neither Care Med's beta nor the growth rate in their dividends is expected to change. What will be the new price of Care Med stock today after the Fed announcement?
Related Book For
Intermediate Financial Management
ISBN: 9780357516669
14th Edition
Authors: Eugene F Brigham, Phillip R Daves
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