Finance P7-21. A) the Risk Term Paper

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61%)

P = 2.60 / (.0739)

P = $35.18

This example clearly shows that by reducing the risk premium, the denominator is lowered and this will have the impact of increasing the stock's price.

P7-23. a) The company's dividend apparently is not growing. The stock price would then be as follows:

P = 5.00 / .11

P = $45.45

b) The credibility issue adds 1% to the required rate of return.

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Thus, the new rate of return is .11 + .01 = .12

P = 5.00 / .12

P = $41.67

The company's stock is worth less as the result of its credibility problem.

c) The value difference is $45.45 - $41.67 = $3.78. The difference can be interpreted as the investor needs to earn a greater return on the investment in order to be willing.....

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