Milton Corporation 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 Corporation has been approached to buy a new company. Milton estimates if it buys the company, their 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. should increase $3.17 per share because the new company would increase the constant growth rate and the required return.

Milton Corporation Recently Paid a Dividend of $1