AKA's stock is currently selling for $11.44.This year the firm had earnings per share of $2.80 and the current dividend is $0.68.Earnings are expected to grow 7% a year in the foreseeable future.The risk-free rate is 10 percent and the expected market return is 14.2 percent.What will be the effect on the price of AKAs' stock if systematic risk increases by 40 percent, all other factors remaining constant?
A)an increase of $1.14
B)a decrease of $0.40
C)a decrease of $1.99
D)cannot determine from the given data

Question

Quizplus · Accepted Answer

Old kₑ = 0.10 + βⱼ(0.142 - 0.10) = 0.10 + 0.042βⱼ
P = $0.68(1.07)/(0.10 + 0.042βⱼ - 0.07) = $11.44
βⱼ = 0.80
New kₑ = 0.10 + 0.8(1.4)(0.042) =0 .147
P = $ 0.7276/(0.147 - 0.07) = $9.45
A decrease of $1.99 a share

AKA's Stock Is Currently Selling for $11