Question

Changes in Growth and Stock Valuation Consider a firm that had been priced using a 10 percent growth rate and a 13 percent required rate. The firm recently paid a $2.40 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 11 percent rate. How much should the stock price change (in dollars and percentage)

Answer 1

Answer:

Change in dollars $45.20

Change in percentage 51.36%

Explanation:

Calculation to determine How much should the stock price change (in dollars and percentage)

First step is to calculate the Price before change

Price before change= ($2.40*1.10)/(.13 - .10)

Price before change = $2.64/0.03

Price before change = $88

Second step is to calculate Price after change

Price after change=($2.40*1.11)/(.13 - .11)

Price after change=$2.664/0.02

Price after change = $133.2

Now let calculate the in dollars and percentage

Change in dollars=$133.2 -$88

Change in dollars=$45.20

Change in percentage=$45.20/$88

Change in percentage=0.5136*100

Change in percentage=51.36%

Therefore How much should the stock price change (in dollars and percentage) will be :

Change in dollars $45.20

Change in percentage 51.36%