Question

"Sunnyfax Publishing pays out all its earnings and has a share price of $ 38.00. In order to​ expand, Sunnyfax Publishing decides to cut its dividend from​ $3.00 to​ $2.00 per share and reinvest the retained funds. Once the funds are​ reinvested, they are expected to grow at a rate of 15​%. If the reinvestment does not affect​ Sunnyfax's equity cost of​ capital, what is the expected share price as a consequence of this​ decision?"

Answer 1

$59.7193

Step-by-step explanation:

Cost of capital = $3/$38 = 0.0789473

g= 0.33 × 15/100

g = 0.33× 0.15

= 0.04545

P0= $2 / ( 0.0789473 - 0.04545)

= $2/0.03349

$59.7193