Question

Consider a firm that had been priced using a 9 percent growth rate and an 11 percent required return. The firm recently paid a $1.40 dividend. The firm just announced that because of a new joint venture, it will likely grow at a 9.5 percent rate.

How much should the stock price change (in dollars and percentage)? (Round your answers to 2 decimal places.)

Change in stock price _____

Change in stock percent _____%

Answer 1

Ans:- Stock Price for Firm will be given byP0= D0*(1+g) / (rs - g), where D0 is the last dividend paid, rs is the required return and g is the growth rate.

If g=9%, then stock price P0 = $1.40 * (1+0.09) / (0.11 - 0.09) = $76.30.

If g=9.5%, then Stock price P0 = $1.40 * (1+0.095) / (0.11 - 0.095) = $102.20

Change in Stock Price = $101.73 - $76.30 = $25.90

Change in stock Percentage = Change in Price / Initial Price = $25.90 / $76.30 = 0.3394 = 33.94%.

Therefore, the change in stock price will be $25.90 and the change in stock percentage will be 33.94%.

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