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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)

Respuesta :

Answer: $28.50, 104%

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%

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