Question: The price of a stock is dependent on the return and risk. Derive the p

Question

Question:

The price of a stock is dependent on the return and risk. Derive the price if the risk premium is 10%, the bheta is 1.7, the net profit margin is 12%, the asset turnover is 1.6, the leverage ratio is 1.2 and the retention ratio is 80%. While the D0 (Dividend Zero) is $5. Afterward, the bheta becomes 2, while the net profit margin, asset turnover and leverage ratio is .08, 1 and 1.2 and retention ratio is 90%.

Please show your work (step by step). The more work you show, the better for me because it helps me understand how you arrived at your solution. This question is important to me because I need it for a take home exam. I would appreciate any help that I can get.

Explanation / Answer

Required rate of return = Rf + Beta x Risk premium

= 4 + 1.7 x 10

= 21%

g = b x r

= 12 x 80%

= 9.60%

Price of stock = D0(1+g) / (Ke-g)

= 5(1+0.096) / (0.21 - 0.096)

= $48.07

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