A corportations most recent dividend was $1.85 per share, its expected annual ra

Question

A corportations most recent dividend was $1.85 per share, its expected annual rate of dividend growth is 5%, and the required return is now 15%. 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 9% and lower the required return to 11%. c.)Eliminate an unprofitable product line, which will increase the dividend growth rate to 9% and raise the required return to 18%. d.) merge with another firm which will reduce the growth rate to 1% and raise the required return to 17%.

Explanation / Answer

Hi, If you like my answer rate me lifesaver first...that way only I can earn points. Thanks a) Using dividend discount model, Price = $1.85 * 1.05/ (15% - 5%) = $ 19.43 b) Price = $1.85 * 1.09/ (11% - 9%) = $ 100.83 c) Price = $1.85 * 1.09/ (18% - 9%) = $ 20.41 d) Price = $1.85 * 1.01/ (17% - 1%) = $ 11.68

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