Consider a firm that had been priced using an 8.5 percent growth rate and a 10.5

Question

Consider a firm that had been priced using an 8.5 percent growth rate and a 10.5 percent required return. The firm recently paid a $1.70 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 9.0 percent rate.

How much should the stock price change (in dollars and percentage)? (Do not round intermediate calculations and round your final answers to 2 decimal places.)

Consider a firm that had been priced using an 8.5 percent growth rate and a 10.5 percent required return. The firm recently paid a $1.70 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 9.0 percent rate.

Explanation / Answer

Hi,

Current Stock Price = D1/(ke - g) = 1.70*(1+8.5%)/(10.5%-8.5%) = $92.225

Revised Stock Price = D1/(ke - g) = 1.70*(1+9%)/(10.5%-9%) = $123.53

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Change in Price (Dollars) = 123.53 - 92.225 = $31.31

Change in Stock (%) = 31.31/92.225*100 = 33.95%

Thanks.

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