Question

Consider a firm that had been priced using a 10.00 percent growth rate and a 14.00 percent required rate. The firm recently paid a $1.00 dividend. The firm has just announced that because of a new joint venture, it will likely grow at a 12.00 percent rate. How much should the stock price change (in dollars and percentage)

Answer 1

Considering a firm that had been priced using a 10.00 percent growth rate and a 14.00 percent required rate. The stock price should increase by $25.00 in dollars and 100% in percentage

What is the stock price?

First calculate the old stock price using the dividend growth model:

Stock Price = Dividend / (Required rate - Growth rate)

Stock Price = $1.00 / (0.14 - 0.10)

Stock Price = $1.00 / 0.04

Stock Price = $25.00

Next calculate the new stock price using the new growth rate:

New Stock Price = Dividend / (Required rate - New Growth rate)

New Stock Price = $1.00 / (0.14 - 0.12)

New Stock Price = $1.00 / 0.02

New Stock Price = $50.00

To calculate the change in stock price in dollars:

Change in Stock Price = New Stock Price - Old Stock Price

Change in Stock Price = $50.00 - $25.00

Change in Stock Price = $25.00

To calculate the change in stock price in percentage:

Change in Percentage = (Change in Stock Price / Old Stock Price) * 100

Change in Percentage = ($25.00 / $25.00) * 100

Change in Percentage = 100%

Therefore the stock price should increase by $25.00 in dollars and 100% in percentage.

Answer 2

Answer: $28.50, 104%

Step-by-step explanation:

First and foremost, we have to calculate the value of the price of the old stock which will be:

= Dividend for next period/(Required return-Growth rate)

= (1 × 1.1)/(0.14 - 0.1)

= 1.1/0.04

= $27.5

The value of the new stock price will be:

=(1 × 1.12)/(0.14 - 0.02)

= $56

Therefore, based on the above calculation, the dollar change will be:

= $56 - $27.50

= $28.50

The percentage change will also be:.= = (28.5/27.5) × 100

=104%