Prokter and Gramble$($PKGR$)$ has historically maintained a$$ debt$-$equity ratio of approximately

$0\mathrm{.}23.$

Its current stock price is

$$54$

per$$ share, with

$2\mathrm{.}1$

billion shares outstanding. The firm enjoys very stable demand for its$$ products, and consequently it has a low equity beta of

$0\mathrm{.}575$

and can borrow at

$4\mathrm{.}3\%,$

just $20$ basis points over the$$ risk$-$free rate of

$4\mathrm{.}1\%.$

The expected return of the market is

$9\mathrm{.}9\%,$

and$$ PKGR$\text{'}$s tax rate is

$26\%.$

a$.$ This$$ year, PKGR is expected to have free cash flows of

$$$$5\mathrm{.}5$

billion. What constant expected growth rate of free cash flow is consistent with its current stock$$ price?

b$.$ PKGR believes it can increase debt without any serious risk of distress or other costs. With a higher$$ debt$-$equity ratio of

$0\mathrm{.}575,$

it believes its borrowing costs will rise only slightly to

$4\mathrm{.}6\%.$

If PKGR announces that it will raise its$$ debt$-$equity ratio to

$0\mathrm{.}575$

through a leveraged$$ recap, determine the increase or decrease in the stock price that would result from the anticipated tax savings.

Question content area bottom

Part $1$

a$.$ This$$ year, PKGR is expected to have free cash flows of

$$$$5\mathrm{.}5$

billion. What constant expected growth rate of free cash flow is consistent with its current stock$$ price?

The constant expected growth rate of free cash flow is consistent with its current stock price is

enter your response here$\%.$

$($Round to two decimal$$ places.$)$