Question

Management action and stock value REH corporstions most recent dividend was $3 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 firms activities. Determine the impact on share price for each of the following proposed actions, and indicate the best alternatives.

Calculate your answers to each of the 5 parts from this problem (a through e). Make sure to show your calculations for each part and clearly indicate your answer.

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

B. Invest in a new machine that will increase the dividend growth rater to 6% and lower the required return to 14%

C. Eliminate and unprofitable line, which will increase the dividend growth rate to 7% and raise the required return rate to 17%

D. Merge with another firm, which will reduce the growth rate to 4% and raise the required return to 16%

E. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to 8% and increase the required return to 17%

Which alternative should REH Corporation take? Explain why you picked that alternative.

Discuss any risk/return elements the corporation should consider with this selection.

Discuss what variable(s) would change in the equity valuation model to reflect changes in risk and how would the market price of the stock change with changes in risk.

Discuss what variable(s) would change in the equity valuation model to reflect changes in return and how would the market price of the stock change with changes in return.

Answer 1