Ecology Labs, Inc. will pay a dividend of $3 per share in the next 12 months. Th

Question

Ecology Labs, Inc. will pay a dividend of $3 per share in the next 12 months. The required rate of return is 10 percent and the constant growth rate is 5 percent. a) computer P0, b) Assume Ke, the required rate of return, goes up to 12 percent; what will be the new value of P0? c) Assume the growth rate (g) goes up to 7 percent; what will be the new value of P0? Ke goes back to its original value of 10 percent; d) Assume D1 is $3.50; what will be the new value of P0? Assume Ke is at its original value of 10 percent and g goes back to its original value of 5 percent.

Explanation / Answer

a) P0= 3/(.1-.05)= $60 b)P0= 3/(.12-.05)=$42.857

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