Burkhardt Corp. pays dividend every year and the company promised to increase its dividend by 3...
Burkhardt Corp. pays dividend every year and the company promised to increase its dividend by 3 percent per year indefinitely. Yesterday, the company paid a dividend of $2 ( is $2). Today morning, the company made a news announcement that the dividend growth rate will decline to 1 percent per year indefinitely from now on. If the discount rate is 8 percent per year compounded annually, how much will the price of the company’s stock drop today immediately after the news announcement?
Homework Answers
Stock Price = Next expected Dividend/(Required return - growth rate)
Price at 3% growth rate = 2*(1+3%)/(8%-3%)
= $41.2
Price at 1% growth rate = 2*1.01/(8%-1%)
= $28.86
Hence. price will drop by $12.34 per share
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