Question
This year, Global Management (GM) had earnings per share (EPS) of $2.50 and issued a dividend of $1.52 per share. Dividends are expected to grow
This year, Global Management (GM) had earnings per share (EPS) of $2.50 and issued a dividend of $1.52 per share. Dividends are expected to grow at 5% every year. GM has an equity beta of 1.46. Assume a risk-free rate of 3% and an expected market risk premium of 6%.
A. How much should a share of GM's stock be worth?
B. A major competitor of GM just announced a series of investments in the midwest. Due to the intense competition in the sector,GM announces that it does not expect its earnings to keep growing at the same steady rate they used to. Instead,earnings are expected to remain constant at $2.50 per share. The new policy will consist of distributing all earnings in the form of dividends. How would you expect the price of GM to change following the announcement?
C. In order to revitalize its business, a week later, GM announces that it plans to invest in a growth project in Asiathat is expected to yield a 15% return on investment per year. As a result, only 50% of the earnings will be distributed as dividends.The remaining share will be used to reinvest in the growth project. How would you expect the price of GM's stock to change following the announcement?
D. Calculate the volatility of GM's stock based on your answers in (b) and (c). Is the risk diversifiable or systematic? Explain.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started