Changes in Growth and Stock Valuation Consider a firm that had been priced using a 10 percent growth rate and a 14 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 percent rate.How much should the stock price change (in dollars and percentage)?
A)$25, 1 percent
B)$25, 100 percent
C)$28.50, 1.04 percent
D)$28.50, 104 percent

Question

Quizplus · Accepted Answer

The stock price change is calculated using the Gordon Growth Model. Initially, the price is $1 / (0.14 - 0.10) = $25. With the new growth rate, the price is $1 / (0.14 - 0.12) = $50. The change in price is $50 - $25 = $25, which is a 100% increase. However, the correct percentage change should be 104% because the new price is $28.50, not $50.

Changes in Growth and Stock Valuation Consider a Firm That