Question

Tennessee Valley Antiques would like to issue new equity shares if its cost of equity declines to 12.5 percent. The company pays a constant annual dividend of $2.10 per share. What does the market price of the stock need to be for the firm to issue the new shares?a.$15.10b. $15.60c. $18.40d. $17.90e. $16.80

Answer 1

Answer:

Stock price will be $16.8

So option (e) is the correct option

Explanation:

We have f=given expected dividend $D_1= 2.10per\ share$

Required return $R_e=12.50%=0.125$

Growth rate = 0 % = 0.00

We have to find the stock price $p_0$

Stock price is given by

$p_0=\frac{D_1}{R_e-g}=\frac{2.10}{0.125-0.00}= 16.8$

So stock price will be $16.8

So option (e) is the correct answer