HDTV has planned on diversifying into the dual-VCR field. As a result, HDTV's beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firm's earnings would increase from 12% to 16%. The expected market return, km, is 14%; the risk free rate, rf, is 7%; and the current dividend, D_o, is $0.50. Should HDTV go into the dual-VCR field? A) No-stock price decrease $7.82 B) Yes-stock price increase $9.89 C) Yes-stock price increase $3.81 D) No-stock price decrease $3.78

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Solution: k_old = .07 +1.2(.14-.07) = .154 k_new = .07 +1.6(.07) = .182 P_o = .50(1.12)/(.154 - .12) = $16.47 P_n = .50(1.16)/(.182 - .16) = $26.36

HDTV Has Planned on Diversifying into the Dual-VCR Field