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What is the new price of Ecology Labs, Inc. shares?

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Problem 10/22.

Ecology Labs, Inc., will pay a dividend of $3 per share in the next 12 months (D1). The required rate of return (Ke) is 10 percent and the constant growth rate is 5 percent.

a. Compute P0.
(In the remaining questions for problem 22 all variables remain the same except the one specifically changed. Each question is independent of the others.)

b. Assume Ke, the required rate of return, goes up to 12 percent; what will be the new value of P0?

c. Assume the growth rate (g) goes up to 7 percent; what will be the new value of P0?

d. Assume D1 is $3.50; what will be the new value of P0?

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Solution Summary

This solution uses the constant growth model in its calculations to determine the price of the stock.

Solution Preview

The constant growth model or the Gordon Growth Model states that the price of the stock is given by: D1/(Ke -g), where r is the constant ...

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