Changes in Growth and Stock Valuation Consider a firm that had been priced using a 6 percent growth rate and a 9 percent required rate.The firm recently paid a $0.50 dividend.The firm has just announced that because of a new joint venture,it will likely grow at an 8 percent rate.How much should the stock price change (in dollars and percentage)?
A)$33.33, 67 percent
B)$33.33, 198 percent
C)$36.33, 67 percent
D)$36.33, 206 percent

Question

Quizplus · Accepted Answer

To calculate the new stock price, we need to use the constant growth stock valuation formula:

P0 = D1/(r-g)

Where P0 is the current stock price, D1 is the next year's dividend, r is the required rate of return, and g is the growth rate.

We know that the current dividend is $0.50, and the new growth rate is 8%, so we can calculate the new dividend as:

D1 = D0(1+g) = $0.50(1+0.08) = $0.54

The required rate of return is still 9%, so we can plug in the values:

P0 = $0.54/(0.09-0.08) = $36.33

Therefore, the stock price should increase by $36.33 - $0 = $36.33. As a percentage, this is an increase of ($36.33/$0) x 100% = 206%.

The answer is D, $36.33, 206%.

Changes in Growth and Stock Valuation Consider a Firm That