Anonymous
Anonymous asked in Business & FinanceInvesting · 1 decade ago

Finance problem: last one: enjoy enjoy!!!!????!!!!!?

ABC corporation is planning a new common stock issue of 5 million shares to fund a new project. The increase in shares will bring ABC's total shares outstanding to 25 million. ABC's long term growth rate is 6%, and its current required rate of return is 12.6%. The firm just paid a $1.00 dividend and the stock sells for $16.06 in the market. When the new equity issue was announced, the firm's stock price dropped. ABC estimates that the company's growth rate will increase to 6.5% with the new project, but since the project is riskier than average, the firm's cost of capital will increase to 13.5%. Using the Discounted Cash Flow (DCF) growth model, what is the change in equilibrium stock price?

a.-1.77

b.-1.06

c.-0.85

d.-0.66

e.-0.08

Update:

hmm, nitin, is that so, I will ask my teacher and get back to u!

1 Answer

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  • 1 decade ago
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    if Abc takes the new project then the new dividend will be $1.065

    so usind DDM new stock price will be

    $1.05/(0.135-0.065) = $15.21

    so the change in price will be $16.06-$15.21 -=$0.85

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