Tennessee Valley Antiques would like to issue new equity shares if its cost of equity declines to 12.5 percent.The company pays a constant annual dividend of $2.10 per share.What does the market price of the stock need to be for the firm to issue the new shares?

Question

Quizplus · Accepted Answer

We can use the constant growth model to find the market price of the stock:
P0 = D1 / (r-g)
Where:
D1 = the next annual dividend = $2.10
r = the required rate of return (cost of equity) = 12.5%
g = the expected growth rate of dividends = 0% (constant dividend)

Plugging in the values, we get:
P0 = $2.10 / (0.125 - 0) = $16.80

Therefore, the market price of the stock needs to be $16.80 for the firm to issue the new shares.

Tennessee Valley Antiques Would Like to Issue New Equity Shares