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The stock of Robotic Atlanta Inc. is trading at $40 per share. In the past, the firm has paid a constant dividend of $5 per share and it has just paid an annual dividend. However, the company will announce today new investments that the market does not know about. It is expected that with these new investments, the dividends will grow at 5% forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?

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Solution Summary

The prices of stock are determined. The price of the stock announcements are determined.

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D1 = Do *(1+g)= 5*(1+5% )=5.25
The DDM model shows that
P = D1/(R-g)
where g is the growth rate and R ...

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