Question

The stock of Robotic Atlanta Inc. is trading at $ 29.48 per share. In the past, the firm has paid a constant dividend of $ 5.52 per share and it has just paid an annual dividend (i.e., D0 = 5.52 ). However, the company will announce today new investments that the market did not know about. It is expected that with these new investments, the dividends will grow at 3.4 % forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?

Answer 1

The stock of Robotic Atlanta Inc. is trading at $ 29.48 per share. In the past, the firm has paid a constant dividend of $ 5.52 per share and it has just paid an annual dividend (i.e., D0 = 5.52 ). However, the company will announce today new investments that the market did not know about. It is expected that with these new investments, the dividends will grow at 3.4 % forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?

Current Trading Price = $29.48

In past the firm has been paying a Constant dividdend each year which means there is no growth in dividends.

D0 = $5.52

Calculating the Required rate of return or Discount rate with no growth rate:-

Ke = 18.72%

Now, the dividend growth rate(g) is 3.4% forever.

Now, Calculating the Price of Stock with Discount rate remains the same.

P0 = $37.26

So, the Price of Stock after announcement is $37.26

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PO 5.52(1 + 0.034) (0.1872 – 0.034)