Question

Astout, a pharmaceutical company, stock currently sells for $75 per share. Two months ago the firm announced a cash dividend of $7.5 next year, and the dividend is expected to grow at 4%. Astout required return was 14% but due to COVID-19 outbreak and higher risk exposure the firm required return is expected to increase to 18%. Nonetheless, due to higher market demand, the divided growth rate is expected to reach 8% starting after the next dividend. Based on this information, and assuming everything else is constant, do you expect the stock price to?

Select one:

a. Increase

b. Remain unchanged

c. Not enough information

d. Decrease

need the anwnser fast

Answer 1

Remains Unchanged. (which is Option B)

____

Explanation:

We can calculate the price of the stock after COVID as below:

Price of Stock = Dividend Next Year/(1+Required Rate of Return after COVID)^1 + Dividend Next Year*(1+Growth Rate after COVID)/(1+Required Rate of Return after COVID)^1*1/(Required Rate of Return after COVID - Growth Rate after COVID)

Substituting values in the above formula, we get,

Price of Stock = 7.5/(1+18%)^1 + 7.5*(1+8%)/(1+18%)^1*1/(18%-8%) = $75