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Kaylis [27]
3 years ago
14

JRN Enterprises just announced that it plans to cut its dividend payout in the next year (Div1) from $3.00 to $1.50 per share an

d use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow indefinitely at 4% per year and JRN's stock was trading at $25.50 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:
Business
1 answer:
NeX [460]3 years ago
7 0

Answer:

21.42

Explanation:

rE= Div1 / P0+ g

= 3.00/ 25.50 + .04

= 0.15% or 15%

Solve for new stock price:

P0= Div1 / (rE- g)

= 1.50/ (0.15- .08)

=1.50/0.07

= 21.42

Therefore assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to: 21.42

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