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JRN Enterprises just announced that it plans to cut its dividend from $2.50 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 4% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:


Question 6 options:


A)


$25.00


B)


$15.00


C)


$31.25


D)


$27.50

Respuesta :

TomShelby

Answer:

A) $ 25.00

Explanation:

We use the gordon model to know the new intrinsic value of the share:

[tex]\frac{divends_1}{return-growth} = Intrinsic \: Value[/tex]

First with the current date we solve for the rate of return:

P = $25

g = 0.04

D = 2.50

[tex]\frac{2.5}{return-0.04} = 25[/tex]

[tex]\frac{2.5}{25} + 0.04= return[/tex]

return = 0.14 = 14%

Now we solve for intrinsic value:

D = 1.50

r = 14%

g = 8%

[tex]\frac{1.50}{0.14-0.08} = Value[/tex]

Intrinsic value = $25.00

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