This Question: 1 pt 41 of 10 (0 complete) This Quiz: 10 pts possible pe Manageme

Question

This Question: 1 pt 41 of 10 (0 complete) This Quiz: 10 pts possible pe Management action and stock value REH Corporations most recent end was S1 64 per share, its e pected annual rate of de end growthis 5% and the required return is now 15% A variety of proposals are being considered by management to redired the firm's acti tes Determine the impad on share price for each of the follow proposed a hons a. Do nothing, which will leave the key financial variables unchanged b. Invest n a new machine that wincrease the dividend growth rate to 7% and lower the requred return to 12% c. Ernrate an unprofitable product line, which wil ncrease te dividend growth rate to 9% and rase the required return to 169. d. Merge with another firm, which will reduce the growth rate to 3% and raise the requred return to 16% e. Ao ure a subsidiary operation from another manufacturer The acquisition should increase the d de d growth rate to 8% and increase the required return to a. if the im does nothing that will leave the key financial variables unchanged, the value of the irm will be (Round to the nearest cent.) b.rthe fim ests cent) inanew machine that wilincrease the dividend growth rate to 7% and lower te reared return to 12%, te value ofthe frm wil bes( Round to the nearest ?. " the firm eliminates an unprofitable product line that wn increase te dvidend growth rate to 916 and raise the required return to 16% the value of te tm nearest cent) . be S (Rond to the d. If the firm merges with another firm that we reduce the growth rate to 3% and raise the required return to 16%, the value of the frm wil be S (Round to the nearest cent e. If the firm acoures a subsidiary operation from another manufacturer hat ? increase the dividend o n ate to 8% and increase the requred return to 16%, the value of the firm w be?(Round to the nearest cent)

Explanation / Answer

Ans a) Value of share = dividend in next year/ ( required rate - growth rate)

= 1.64 * ( 1+ .05) /(.15 - .05)

= $17.22

Since the number of stock is not given it will be difficult to find value of firm but it will be equal to share price* value of share.

Ans b) Value of share = 1.64 * 1.07 /(.12 - .07)

= $ 35.1

Ans c) Value of share = 1.64 * 1.09/(.16 - .09)

= $25.54

Ans d) Value of share = 1.64 * 1.03 /(.16 - .03)

= $ 12.99

ans e) Value of share = 1.64 * 1.08 /(.16 - .08)

= $ 22.14

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