REH Corporation's most recent dividend was $3.75 per share, its expected annual rate of dividend growth is 6%, and the required return is now 15%. A variety of proposals are being considered by management to redirect the firm's activities. Determine the impact on share price for each of the following proposed actions, and indicate the best alternative. a. Do nothing, which will leave the key financial variables unchanged. b. Invest in a new machine that will increase the dividend growth rate to 6% and lower the required return to 14%. c. Eliminate an unprofitable product line, which will increase the dividend growth rate to 7% and raise the required return to 17%. d. Merge with another firm, which will reduce the growth rate to 4% and raise the required return to 16%. e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to 8% and increase the required return to 17%.
REH Corporation's most recent dividend was $3.75 per share, its expected annual rate of dividend growth is 6%, and the required return is now 15%. A variety of proposals are being considered by management to redirect the firm's activities. Determine the impact on share price for each of the following proposed actions, and indicate the best alternative. a. Do nothing, which will leave the key financial variables unchanged. b. Invest in a new machine that will increase the dividend growth rate to 6% and lower the required return to 14%. c. Eliminate an unprofitable product line, which will increase the dividend growth rate to 7% and raise the required return to 17%. d. Merge with another firm, which will reduce the growth rate to 4% and raise the required return to 16%. e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the dividend growth rate to 8% and increase the required return to 17%.
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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Transcribed Image Text:REH Corporation's most recent dividend was $3.75 per share, its expected annual rate of
dividend growth is 6%, and the required return is now 15%. A variety of proposals are being
considered by management to redirect the firm's activities. Determine the impact on share price
for each of the following proposed actions, and indicate the best alternative.
a. Do nothing, which will leave the key financial variables unchanged.
b. Invest in a new machine that will increase the dividend growth rate to 6% and lower the
required return to 14%.
c. Eliminate an unprofitable product line, which will increase the dividend growth rate to 7% and
raise the required return to 17%.
d. Merge with another firm, which will reduce the growth rate to 4% and raise the required return
to 16%.
e. Acquire a subsidiary operation from another manufacturer. The acquisition should increase the
dividend growth rate to 8% and increase the required return to 17%.
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