Ecology Labs, Inc., will pay a dividend of $4.60 per share in the next 12 months

Question

Ecology Labs, Inc., will pay a dividend of $4.60 per share in the next 12 months (D1). The required rate of return (Ke) is 17 percent and the constant growth rate is 7 percent. (Each question is independent of the others.)

Compute the price of Ecology Labs' common stock. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Assume Ke, the required rate of return, goes up to 19 percent. what will be the new price? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Assume the growth rate (g) goes up to 9 percent. what will be the new price? Ke goes back to its original value of 17 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Assume D1 is $6.00. what will be the new price? Assume Ke is at its original value of 17 percent and g goes back to its original value of 7 percent. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Ecology Labs, Inc., will pay a dividend of $4.60 per share in the next 12 months (D1). The required rate of return (Ke) is 17 percent and the constant growth rate is 7 percent. (Each question is independent of the others.)

Explanation / Answer

Value of stock =4.6/(.17-.07)

                       =4.6/.1

                          =$46

If required rate of return goes up to 19

Value of stock =4.6/(.19-.07)

                       =4.6/.12

                          =$38.33

Growth rate change to 9% and rate of return is 17%

Value of stock =4.6/(.17-.09)

                       =4.6/.08

                          =$57.5

If dividend change to $6

Value of stock =6/(.17-.07)

                       =4.6/.1

                          =$60

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