HigherEducation, Inc., a private educational company\'s share price is $130 per

Question

HigherEducation, Inc., a private educational company's share price is $130 per share; earnings and dividends are $12.20 a share, and the growth rate is zero. They have just announced a new growth strategy whereby the company's earnings would begin growing by 6% per year and remain stable at this new rate. This new growth strategy will require the company to reinvest 40% of their earnings starting at the end of this year (t = 1). What will happen to the price per share of this company? Think carefully, and draw a time line.

a)Insufficient information to determine the price change.

b)Price will remain unchanged.

c)Price will decrease by $86.27 per share.

d)Price will increase by $86.27 per share.

Explanation / Answer

When there is no growth

Cost of Equity = Dividend/Current Share Price

Cost of Equity = 12.20/130

Cost of Equity = 9.3846%

Share Price after changes = Expected Dividend/Cost of Equity - growth rate)

Share Price after changes = (12.20*(1-40%))/(9.3846%-6%)

Share Price after changes = $ 216.27

Price will increase by = 216.27 - 130

Price will increase by =$ 86.27

Answer

d)Price will increase by $86.27 per share

Related Questions

Navigate

• Browse (All)
• Browse H
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.