Question

Suppose your boss regards ultimate as being quite risky and believes that the required rate of return should be higher than the 12 percent originally specified. Rework the problem under the conditions originally given, except change the required rate of return to (1) 13 percent, (2) 15 percent, and (3) 20 percent to determine the effects of the higher required rates of return on ultimate's stock price. What will be the new stock price of ultimate when the required rate of return is (1) 13 percent, (2) 15 percent, and (3) 20 percent?

Answer 1

When the required rate of return for Ultimate's stock is changed to 13 percent, the new stock price will be $1,617.81. The new stock price will be $1,470.58 when the required rate of return is 15 percent, and $1,321.69 when it is 20 percent.

Step-by-step explanation:

When the required rate of return for Ultimate's stock is changed to 13 percent, the new stock price can be calculated using the original information provided. The formula to calculate the stock price is:

Stock Price = ($1,000 * 0.35) + ($1,000 * 0.6) + ($11,000 * 0.05)

Substituting the new required rate of return of 13 percent into the formula:

Stock Price = ($1,000 * 0.35) + ($1,000 * 0.6) + ($11,000 * 0.05) / (1 + 0.13)

Simplifying the equation gives:

Stock Price = $491.81 + $843.53 + $500 / (1.13)

Stock Price = $1,617.81

Similarly, the new stock price when the required rate of return is 15 percent would be $1,470.58, and when it is 20 percent, the new stock price would be $1,321.69.