Question

Tennessee Valley Antiques would like to issue new equity shares if its cost of equity declines to 12.5 percent. The company pays a constant annual dividend of $2.10 per share. What does the market price of the stock need to be for the firm to issue the new shares?a.$15.10b. $15.60c. $18.40d. $17.90e. $16.80

Answer 1

Stock price will be $16.8

So option (e) is the correct option

Step-by-step explanation:

We have f=given expected dividend
`D_1=$2.10per\ share`

Required return
`R_e=12.50%=0.125`

Growth rate = 0 % = 0.00

We have to find the stock price
`p_0`

Stock price is given by

`p_0=(D_1)/(R_e-g)=(2.10)/(0.125-0.00)=$16.8`

So stock price will be $16.8

So option (e) is the correct answer