Question
Investors expect a stock to pay a $1.89 dividend one year from now. They also expect future dividends to grow at 2.5% per year indefinitely
Investors expect a stock to pay a $1.89 dividend one year from now. They also expect future dividends to grow at 2.5% per year indefinitely after this first dividend is paid. The required rate of return for the stock is 10.8%. Suppose new information arrives. As a result of this new information, investors do not change their estimate of the dividend mentioned earlier; however, they change their estimate of the future dividend growth rate to 4.4% per year. If markets are efficient, how much should the firm's stock price increase one investors have updated their expectations about future dividend growth? Round your answer to the nearest penny.
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