Question

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 and 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:

Answer 1

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