Question

In: Finance

Ecology Labs Inc. will pay a dividend of $3.75 per share in the next 12 months...

Ecology Labs Inc. will pay a dividend of $3.75 per share in the next 12 months (D1). The required rate of return (Ke) is 16 percent and the constant growth rate is 6 percent. (Each question is independent of the others.)   
  
a. Compute the price of Ecology Labs' common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

price:
  
b. Assume Ke, the required rate of return, goes up to 19 percent. What will be the new price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

new price:
  
c. Assume the growth rate (g) goes up to 10 percent. What will be the new price? Ke goes back to its original value of 16 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

new price:
  
d. Assume D1 is $5.00. What will be the new price? Assume Ke is at its original value of 16 percent and g goes back to its original value of 6 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
  

new price:

Solutions

Expert Solution

Dividend discounting method is used to find the share present value by discounting the predicted dividend

Formula is,

Value of share = Dividend per share/ (Discount rate -Dividend growth rate)

Let's put all the values in the formula

= 3.75/ 0.16 -0.06

= 3.75/ 0.1

= 37.5

So the price of the stock is $37.5

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Let's put all the values in the formula

= 3.75/ 0.19 -0.06

= 3.75/ 0.13

= 28.85

So the price of the stock is $28.85

--------------------------------------------------------------------------------------------------------------------------

Let's put all the values in the formula

= 3.75/ 0.16 -0.1

= 3.75/ 0.06

= 62.5

So the price of the stock is $62.5

--------------------------------------------------------------------------------------------------------------------------

Let's put all the values in the formula

= 5/ 0.16 -0.06

= 5/ 0.1

= 50

So the price of the stock is $50

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Feel free to comment if you need further assistance J

Pls rate this answer if you found it useful.

jeff jeffy answered 2 years ago
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