Question

Radverb Inc. paid a dividend of $2.00 last year. The company expects to increase the dividend at a constant rate of 2% per year, indefinitely. The current price for the stock is $34. What will the price of Radverb's stock be if the required return falls by half (by 50%)?

Answer 1

Solution and Explanation:

The given ke  = 0.08 , Ke = 8%

Now, the required return falls by half (by 50%)

Ke (revised) = 8 percent multiply with the 50 percent = 4%

The Price of Radvob’s stock = $2(1.02) / 0.04-0.02$ =$102

Do= $2

G=2%

The given Current price = $34

Ke= required return = ?

The Current price = $\mathrm{D}_{0}(1+\mathrm{G}) / \mathrm{K}_{\mathrm{e}}-0.02$

Ke=0.08 , Ke=8%

Now, the required return falls by half(by 5%)

Ke (revised) = 8 percent multiply with 50 percent = 4%