Milton Glasses recently paid a dividend of $1.70 per share, is currently expecte

Question

Milton Glasses 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 Glasses has been approached to buy a new company. Milton estimates if it buys the company, its 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? No, because the value of the Milton Co. will decrease by $3.17 per share Yes, because the value of the Milton Co. will increase by $3.17 per share Yes, because the value of the Milton Co. will increase by $2.56 per share Yes, because the value of the Milton Co. will increase by $4.59 per share prvacy Potleg 1 Tech Stpport Fed tVern 28.291 13 Nov 2017 1736:378:15:28 AM MST

Explanation / Answer

Current share price = 1.7*(1.05)/(0.11-0.05)= 29.75 New share price = 1.7*(1.065)/(0.12-0.065)= 32.92 Yes, beacause the value of the Milton Co. will increase by $3.17(32.92-29.75) per share

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