Question

Please assist

JRN Enterprises just announced that it plans to cut its dividend from $2.75 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 $25.50 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. 557.48 OB. $10.20 OC. $25.50 OD. $22.99

Answer 1

Step 1: Calculate the value of r

Using the Dividend Discount (Constant Growth) Model
Po= Div1/ (r-g)

Dividend for next year= Div1 = $2.75
Cost of equity= r
Growth rate of dividends/earnings= g= 6%
Current stock price= Po= $25.50

Plugging in the above values:
r= 6%+2.75/25.50 = 16.78%

Step 2: Calculate the new share price

Dividend for next year= Div1 = $1.10
Cost of equity= r= 16.78%
Growth rate of dividends/earnings= g= 12%
Current stock price= Po=
Plugging in the values:
Po= 1.1/(16.78%-12%) = $ 22.99

So, assuming that JRN’s risk is unchanged by the expansion, the value of a share of JRN after announcement is closest to $22.99. So, correct option is Option D as the same is closest to the desired result and rest of the options are incorrect.