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JRN Enterprises just announced that it plans to cut its dividend from $2
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:
| a. |
$31.25 |
|
| b. |
$27.50. |
|
| c. |
$15.00. |
|
| d. |
$20.00. |
|
| e. |
$25.00. |
Expert Solution
Re = [ D1 / P0 ] + g
Re = [ $ 2.50 / $ 25 ] + 0.04
Re = 0.1 + 0.04 = 0.14 or 14%
New Stock Price = D1 / Re - g
New Stock Price = $ 1.50 / 0.14 - 0.08 = $ 1.50 / 0.06 = $ 25
So correct option is e. $ 25.00
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