The risk free rate of return, Rrf, is 11%; the required rate of return on the market, Rm, is14%; and Schuler Company's stock has a beta coeffecient of 1.5.
a. If the dividend expected during the coming year is $2.25 and the growth rate is a constant 5%, what is price should Schuler's stock sell?
b. Now suppose the Federal Reserve Board increases the money supply causing the risk-free rate to drop to 9% & Rm to fall to 12%. What would this do to the price of the stock?
c. In addition to the change in part(b), suppose investors' risk aversion declines; this fact combined with the decline in Rrf, causes Rm to fall to 11%. At what price would Schuler's stock sell?
d. Now suppose Schuler has a change in management. The new team institutes policies that increase the growth rate to 6% as well as enhance revenues and profits so that the beta coefficient declines from 1.5 to 1.3. After implementing these changes and assuming that the expected dividend now increases to $2.27, what is Schuler's new equilibruim price?