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    Managerial Finance 476 (II)

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    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 Pn.
    (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 Pn?

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

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

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    Solution Preview

    a. Compute Pn.
    <br>D1=3, Ke=0.1, g=0.05
    <br>by Discounted Dividend Method,
    <br>Pn= D1/(Ke-g)= 3/(0.1-0.05)= $60
    <br>b. Assume Ke, ...