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Changes in Growth and Stock Valuation Consider a firm that had been priced using a 10...

Changes in Growth and Stock Valuation Consider a firm that had been priced using a 10 percent growth rate and a 13 percent required rate. The firm recently paid a $2.20 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 11 percent rate. How much should the stock price change (in dollars and percentage)?

$19.43, 16%

$41.43, 51%

$41.43, 34%

$19.43, 628%

Solutions

Expert Solution

Current dividend                         2.2000
Rate of return 13.00%
Growth Rate 10.00%
Present value of all dividend =Current Dividend * (1+Growth rate)/(Rate of return-Growth Rate)
= 2.2 *(1+0.10)/(0.13-0.10)
                          80.67
Current dividend                         2.2000
Rate of return 13.00%
Growth Rate 11.00%
Present value of all dividend =Current Dividend * (1+Growth rate)/(Rate of return-Growth Rate)
= 2.2 *(1+0.11)/(0.13-0.11)
122.1
Increase in price                           41.43
% increase =41.43/80.67 51%
Option B is correct

jeff jeffy answered 2 years ago
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