Your company just paid a dividend of $3. Management of your company wants to expand with a new product line. This would...
Your company just paid a dividend of $3. Management of your company wants to expand with a new product line. This would cause your company’s constant growth rate in earnings and dividends to rise from 5% to 9%. Currently, the require rate of return for your company is 10%. This expansion would cause the required rate of return to increase to 13%, due to additional risk. Would shareholders want management to make this change? (Hint, P0). Show calculations to support your YES or NO answer for full credit.
Homework Answers
Using DDM Model,
Stock Price without new Product line = 3(1.05)/(0.10 - 0.05) = $63
Stock Price with new Product line = 3(1.09)/(0.13 - 0.09) = $81.75
As stock Price is increasing after new product line, so shareholders will want this new investment.
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