Milton Glasses recently paid a dividend of $1.70 per share, is currently expected to grow at a constant rate of 5%, and has a required return of 11%. Milton Glasses has been approached to buy a new company. Milton estimates if it buys the company, its constant growth rate would increase to 6.5%, but the firm would also be riskier, therefore increasing the required return of the company to 12%. Should Milton go ahead with the purchase of the new company?

Question

Quizplus · Accepted Answer

The value of the Milton Co. will increase by $3.17 per share because the new company will increase the constant growth rate from 5% to 6.5%, and the required return will increase from 11% to 12%. This will result in a higher stock price for Milton Co.

Milton Glasses Recently Paid a Dividend of $1