Question

Consider a firm that had been priced using a 9.5 percent growth rate and an 11.5 percent required return. The firm recently paid a 1.75 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 10.0 percent rate. How much should the stock price change (in dollars and percentage) (Do not round intermediate calculations. Round your final answer to 2 decimal places.) I have the Change in stock percent right but can't get the change in stock price right and it is not 33.357. Will someone please give me the right answer because I can't keep using my questions for the same question.

Answer 1

Stock price
How much should the stock price change (in dollars and percentage)
Constant growth model = Po = Do ( 1 + g) / ( i - g) = 1.75 x ( 1.095 ) / ( 0.115 - 0.095)
				=	$ 95.81
If the firm’s growth rate changes to 10%, then the new stock price is:
Constant growth model = Po = Do ( 1 + g) / ( i - g) = 1.75 x ( 1.10 ) / ( 0.115 - 0.10)
				=	$ 128.33
The dollar amount of this change is $128.33-$95.81 = $32.52 or 33.94% for the 0.5%
increase to the growth rate.