Question

Blue​ Diamond, Inc., a manufacturer of glass screens just paid an annual dividend of $8.93 Analysts are predicting a​ 5% per year growth rate in dividends forever. If Blue Diamond just announced that it unexpectedly lost an intellectural property lawsuit and was required to pay a penalty. The penalty is $182 million to be paid at the end of this year and $58 million to be paid at the end of next year.

a. If Blue​ Diamond's equity cost of capital is 13.3%​, what price should Blue​ Diamond's stock​ be?

b. If Blue Diamond has 37 million shares outstanding and the equity cost of capital remains at 13.3% after losing the lawsuit​, what change in Blue​ Diamond's stock price would you expect upon this​ announcement? (Assume that the value of Blue​ Diamond's debt is not affected by the​ event.)

c. Would you expect to be able to sell Blue​ Diamond's stock on hearing this announcement and make a​ profit? Explain.

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE