(Combined Effect of Changes in Risk and Return) A common stock has experience a simultaneous change in both risk and return. Required return has increased for 16% to 18%. Because of the change in stockholder expectations of future returns, the growth rate has also increased from 9% to12%. The dividend for next year is expected to remain the same at $1.85 per share.
a. Utilizing the valuation model for constant growth of a common stock, what is the new value of the stock?
b. What was the old value of the stock before the change in risk and return.
c. Explain why the stock increased or decreased in value.