Kinston Industries just announced that it will cut its dividend from $3.00 to $2.00 per share and use the extra funds to expand its operations.Kinston's dividends were expected to grow at a 2% rate,and its share price was $37.50.With the new expansion,Kinston dividends are expected to grow at a 5% rate.Kinston's share price following this announcement should be:

Question

Quizplus · Accepted Answer

The new dividend growth rate of 5% increases the value of the stock. Using the Gordon Growth Model: P = D1 / (r - g), where D1 is the new dividend ($2.00), r is the required rate of return, and g is the growth rate (5%). The new price should be higher than the original $37.50, making $40.00 a reasonable estimate.

Kinston Industries Just Announced That It Will Cut Its Dividend