JRN Enterprises just announced that it plans to cut its next-year dividend, D₁, from $2.00 to $1.10 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 6% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 12% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to: OA. $13.75 OB. $100.00 OC. $25.00 OD. $55.00 www

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
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A stock is expected to pay $1.70 per share every year indefinitely, and the equity cost of capital for the company is 8.1%. What price would an investor be expected to pay per share ten years in the future?

A. $31.49  
B. $52.48  
C. $20.99  
D. $41.98
Transcribed Image Text:A stock is expected to pay $1.70 per share every year indefinitely, and the equity cost of capital for the company is 8.1%. What price would an investor be expected to pay per share ten years in the future? A. $31.49 B. $52.48 C. $20.99 D. $41.98
**Text Transcription for Educational Use:**

JRN Enterprises just announced that it plans to cut its next-year dividend, \( D_1 \), from $2.00 to $1.10 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 6% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 12% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:

- A. $13.75
- B. $100.00
- C. $25.00
- D. $55.00

This text explores how changes in expected dividend growth rates and amounts can affect the valuation of a company’s stock. The problem requires understanding dividend discount models and the effect of growth on stock price.
Transcribed Image Text:**Text Transcription for Educational Use:** JRN Enterprises just announced that it plans to cut its next-year dividend, \( D_1 \), from $2.00 to $1.10 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 6% per year and JRN's stock was trading at $25.00 per share. With the new expansion, JRN's dividends are expected to grow at 12% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to: - A. $13.75 - B. $100.00 - C. $25.00 - D. $55.00 This text explores how changes in expected dividend growth rates and amounts can affect the valuation of a company’s stock. The problem requires understanding dividend discount models and the effect of growth on stock price.
Expert Solution
Step 1: Define common stock.

Common stock refers to the security that offers the investor the ownership interest in the company, which lets the investor participate in profit sharing and gives rights to vote in board elections.

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