(10 points) HigherEducation, Inc., a private educational company\'s share price

Question

(10 points) HigherEducation, Inc., a private educational company's share price is $100 per share; earnings and dividends are $10.40 a share, and the growth rate is zero. They have just announced a new growth strategy whereby the company's earnings would begin growing by 6% per year and remain stable at this new rate. This new growth strategy will require the company to reinvest 45% of their earnings starting at the end of this year (t = 1). What will happen to the price per share of this company? Think carefully, and draw a time line. Insufficient information to determine the price change. Price will increase by $30.00 per share. Price will remain unchanged. Price will decrease by $30.00 per share.

Explanation / Answer

Price= D/ (r-g)

Hence

100 = 10.4/ r

r= 10.4/ 100 = 0.104

r= 10.4%

In year 1, D1= D*(1+g) = 10.4*(1+6%)*(1-45%) = $6.0632

Price at end of year 1= 6.0632/ (10.4%-6%) = $137.8

Hence closest option is

Price will increase by $30 per share.

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