Question

REH? Corporation's most recent dividend was

$ 2.85

per? share, its expected annual rate of dividend growth is

5%

and the required return is now

15%

A variety of proposals are being considered by management to redirect the? firm's activities. Determine the impact on share price for each of the following proposed actions.

a.??Do? nothing, which will leave the key financial variables unchanged.

b.??Invest in a new machine that will increase the dividend growth rate to

9%

and lower the required return to

11?%.

c.??Eliminate an unprofitable product? line, which will increase the dividend growth rate to

7%

and raise the required return to

18%.

d.??Merge with another? firm, which will reduce the growth rate to

1?%

and raise the required return to

17?%.

e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to??

9%

and increase the required return to

18%.

a.??If the firm does nothing that will leave the key financial variables? unchanged, the value of the firm will be

?$nothing.

?(Round to the nearest? cent.)

Answer 1

the initial share price of the firm is :

the dividend discount model states that :

price of a security = D1/ Re - G

D1= $2.85 *1.5 = $2.99

price of the share is = $29.9 (2.99/0.10)

a. doing nothing will remain the share price as it is at $29.9

the impact in share prices is as follows:

b. price of share is : 2.85 *1.09/0.11- 0.09 = $155.32

c. share price is :2.85 (1.07)/0.18-0.07 = $27.73

d. 2.85 (1.01)/0.16 = $17.99

e. 2.85*1.09/0.09 =$34.52

the option b will give the highest share price.