Question

# Management action and stock value   REH​ Corporation's most recent dividend was \$ 1.98 per​ share, its...

Management action and stock value   REH​ Corporation's most recent dividend was \$ 1.98 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 8 ​% and lower the required return to 13 ​%.

c.  Eliminate an unprofitable product​ line, which will increase the dividend growth rate to 6 ​% and raise the required return to 16 % .

d.  Merge with another​ firm, which will reduce the growth rate to 2 ​% and raise the required return to 19 ​%.

e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to  9 % and increase the required return to 16 ​%.

 Share price per the constant dividend growth model = D0*(1+g)/(r-g) where D0 = Last dividend paid per share g = growth rate in dividends r = required return Using the above formula, share price is arrived at as below for each of the situations: a) Share price = 1.98*1.05/(0.15-0.05) = \$          20.79 b) Share price = 1.98*1.08/(0.13-0.08) = \$          42.77 c) Share price = 1.98*1.06/(0.16-0.06) = \$          20.99 d) Share price = 1.98*1.02/(0.19-0.02) = \$          11.88 e) Share price = 1.98*1.09/(0.16-0.09) = \$          30.83

#### Earn Coins

Coins can be redeemed for fabulous gifts.