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The current dividend, D 0 , of the stock of Sun Devil Corporation is $5 per share. Under present conditions, this dividend is expected to
The current dividend, D0, of the stock of Sun Devil Corporation is $5 per share. Under present conditions, this dividend is expected to grow at a rate of 5 percent annually for the foreseeable future. The beta of Sun Devil stock is 1.3. The risk-free rate of return is 8 percent, and the expected market rate of return is 12 percent. Round your answers to the nearest cent.
- At what price would you expect Sun Devil common stock to sell? $
- If the risk-free rate of return declines to 5 percent, what will happen to Sun Devils stock price? (Assume that the expected market rate of return remains at 12%, the dividend growth rate remains at 5%, and D0 remains at $5.) $
- Sun Devils management is considering acquisitions in the machine tool industry. Management expects the firms beta to increase to 1.4 as a result of these acquisitions. The dividend growth rate is expected to increase to 8 percent annually. Would you recommend this acquisition program to management? (Assume the same initial conditions that existed in part a.) Based on stock price of $ , the acquisition program -Select-shouldshould notItem 4 be recommended.
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