Question
REH Corporation's most recent dividend was $3 per share, its expected annual rate of dividend growth is 5%, and the required return is now 15%.
REH Corporation's most recent dividend was $3 per share, its expected annual rate of dividend growth is 5%, 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%.
Calculate the answers to each of the 5 parts from this problem (a through e).
Show answers and the calculations for each part and clearly indicate each part and its answer. (Financial calculator, which key strokes)
Which alternative should REH Corporation take? Explain w that alternative.
Identify and discuss which of the three variables included in this equity valuation model used in part a will change to reflect changes in risk and how would the market price of the stock change with changes in risk.
Identify and discuss which of the three variables included in this equity valuation model used in part a will change to reflect changes in return and how would the market price of the stock change with changes in return.
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