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25 July, 10:29

JRN Enterprises just announced that it plans to cut its dividend payout in the next year (Div1) from $3.00 to $1.50 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow indefinitely at 4% per year and JRN's stock was trading at $25.50 per share. With the new expansion, JRN's dividends are expected to grow at 8% per year indefinitely. Assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to:

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  1. 25 July, 13:26
    0
    21.42

    Explanation:

    rE = Div1 / P0 + g

    = 3.00 / 25.50 +.04

    = 0.15% or 15%

    Solve for new stock price:

    P0 = Div1 / (rE - g)

    = 1.50 / (0.15-.08)

    =1.50/0.07

    = 21.42

    Therefore assuming that JRN's risk is unchanged by the expansion, the value of a share of JRN after the announcement is closest to: 21.42
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