What would be the approximate expected price of a stock when dividends are expected to grow at a 25% rate in each of years 2 and
1 answer:
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Answer:
correct option is a. −$59.03
Explanation:
given data
Old cost of capital (r) 8.00% New cost of capital (r) 11.25%
year 0 1 2 3
cash flow -$1000 $410 $410 $410
solution
we know that here old cost of capital (r) NPV will be
old cost of capital (r) NPV = cash flow 0 year + cash flow ×
put here value
old cost of capital (r) NPV = -1000 + 410 ×
old cost of capital (r) NPV = $56.61
and
new cost of capital (r) NPV will be
new cost of capital (r) NPV = cash flow 0 year + cash flow ×
put here value
new cost of capital (r) NPV = -1000 + 410 ×
new cost of capital (r) NPV = -$2.42
so difference is
Difference = -$2.42 - $56.61
Difference = -$59.03
so correct option is a. −$59.03