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You recently learned in chapter 7 how to value stocks using the constant dividend growth...

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Finance

You recently learned in chapter 7 how to value stocks using the constant dividend growth model and free cash flow valuation model. These models show that current stock prices depend heavily on two value drivers, namely, the future growth rate of dividends/cash flows and the firm's expected future cost of capital. The cost of capital is known as the investors' required return on capital as investors are the capital suppliers and have many investment choices for their capital. (a) If Coronavirus episode is expected to raise the business and financial risks and lower the future earnings of a U.S. financial firm, then what will be its effects on the two value drivers and the firm's current market value. (b) How would a drop in risk-free interest rate brought about by the Federal Reserve Bank affect the two value drivers and the firm's stock price?

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