Suppose that Belly Laugh Inc.'s preferred stock pays an annual, fixed, and perpetual dividend of $8.36.
a) What is Belly Laugh's preferred stock dividend growth rate?
b) If Belly Laugh's preferred equity exposure to systematic market risk is 1.25 times, the return of the market place is 16%, and the market risk premium is 12%, what should Belly Laugh's preferred stock be valued at on a per-share basis?
c) Suppose Belly Laugh's beta increased to 2.56 times, what would the new price of Belly Laugh's preferred stock be on a per-share basis?
d) What would the standard returns be for part c?
e) What would the log returns be for part c?
f) Did Belly Laugh's sensitivity to systematic risk increase or decrease? What was the impact on Belly Laugh's preferred stock? Is this consistent with the Fundamental Theorem of Finance?
g) Based on your answer to part f, what do you think would happen to the price of Belly Laugh's preferred stock if investors' risk aversion decreased?