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Ordinary shares of XYZ Inc

Business

Ordinary shares of XYZ Inc. are currently trading at $5.48. Investors are expecting a dividend of $0.70 at the end of the year, and after that an earnings growth rate of 11% per year for the foreseeable future. However, due to the outbreak of a pandemic, the company has some bad news to report. At the press conference tomorrow, the firm will announce that the next dividend will only be $0.65, and that the expected earnings growth rate should be lowered to a yearly 4.5% for the foreseeable future. The company has had a very reliable dividend payout rate of 40% and investors are expecting that the payout rate will not change. Assuming an efficient market, and no change in cost of equity, what would you expect the new share price to be closest to after tomorrow?
a. $3.53
b. $6.74
c. $3.37

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