Question

Management action and stock value???REH? Corporation's most recent dividend was

$ 1.92$1.92

per? share, its expected annual rate of dividend growth is

55?%,

and the required return is now

1515?%.

A variety of proposals are being considered by management to redirect the?firm's activities. Determine the impact on share price for each of the following proposed actions.

a.??Do? nothing, which will leave the key financial variables unchanged.

b.??Invest in a new machine that will increase the dividend growth rate to

77?%

and lower the required return to

1111?%.

c.??Eliminate an unprofitable product? line, which will increase the dividend growth rate to

99?%

and raise the required return to

19 %19%.

d.??Merge with another? firm, which will reduce the growth rate to

11?%

and raise the required return to

1818?%.

e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to??

9 %9%

and increase the required return to

1919?%.

a.??If the firm does nothing that will leave the key financial variables? unchanged, the value of the firm will be

?$nothing.

?(Round to the nearest? cent.)

Answer 1

Solution A
Current Dividend	1.9200
Rate of return	15.00%
Growth Rate	5%
Share price	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
	=1.92*(1+0.05)/(0.15-0.05)
	20.16
Solution B
Current Dividend	1.9200
Rate of return	11.00%
Growth Rate	7%
Share price	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
	=1.92*(1+0.07)/(0.11-0.07)
	51.36
Solution C
Current Dividend	1.9200
Rate of return	19.00%
Growth Rate	9%
Share price	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
	=1.92*(1+0.09)/(0.19-0.09)
	20.928
Solution D
Current Dividend	1.9200
Rate of return	18.00%
Growth Rate	11%
Share price	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
	=1.92*(1+0.11)/(0.18-0.11)
	30.45
Solution E
Current Dividend	1.9200
Rate of return	19.00%
Growth Rate	9%
Share price	=Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
	=1.92*(1+0.09)/(0.19-0.09)
	20.928