A company with a share price of £5.50 and 500,000 shares plans to undertake an investment project which will change expectations about the future growth of dividends. As a result of the project next year’s dividends are expected to be 25p and they are then expected to grow at 7% per annum. The firm’s required rate of return is 11%. Assume that the share price is determined using the dividend valuation model and that prices adjust as soon as an investment decision is made. For the situation where the company decides to go ahead with the project. What is (i) the new share price and (ii) the net present value of the project?
A company with a share price of £5.50 and 500,000 shares plans to undertake an investment project which will change expectations about the future growth of dividends. As a result of the project next year’s dividends are expected to be 25p and they are then expected to grow at 7% per annum. The firm’s required rate of return is 11%. Assume that the share price is determined using the dividend valuation model and that prices adjust as soon as an investment decision is made. For the situation where the company decides to go ahead with the project. What is (i) the new share price and (ii) the net present value of the project?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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A company with a share price of £5.50 and 500,000 shares plans to undertake an investment project which will change expectations about the future growth of dividends. As a result of the project next year’s dividends are expected to be 25p and they are then expected to grow at 7% per annum. The firm’s required
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