The stock of Robotic Atlanta Inc. is trading at $ 33.71 per share. In the past,

Question

The stock of Robotic Atlanta Inc. is trading at $ 33.71 per share. In the past, the firm has paid a constant dividend (i.e., g = 0) of $ 4.29 per share and it has just paid an annual dividend (i.e., D0 = 4.29 ). However, the company will announce today new investments that the market did not know about. It is expected that with these new investments, the dividends will grow at 5.0 % forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement? (Round your answer to 2 decimal places and record your answer without dollar sign or commas).
The stock of Robotic Atlanta Inc. is trading at $ 33.71 per share. In the past, the firm has paid a constant dividend (i.e., g = 0) of $ 4.29 per share and it has just paid an annual dividend (i.e., D0 = 4.29 ). However, the company will announce today new investments that the market did not know about. It is expected that with these new investments, the dividends will grow at 5.0 % forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement? (Round your answer to 2 decimal places and record your answer without dollar sign or commas).
The stock of Robotic Atlanta Inc. is trading at $ 33.71 per share. In the past, the firm has paid a constant dividend (i.e., g = 0) of $ 4.29 per share and it has just paid an annual dividend (i.e., D0 = 4.29 ). However, the company will announce today new investments that the market did not know about. It is expected that with these new investments, the dividends will grow at 5.0 % forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement? (Round your answer to 2 decimal places and record your answer without dollar sign or commas).

Explanation / Answer

We have to find the discount rate for this using the dividend distibution model (DDM) where in :

r = D1/P0 + g and

P0 = D1/(r-g)

D1 = 4.29 *1.05 = $4.5045

r = 12.726% =0.12726

g = 0.05

Hence P0 = 4.5045/(0.12726-0.05) = $58.30

Hence price of the stock after announcement = $58.30

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