JRN Enterprises just announced that it plans to cut its dividend from $2.75 to $

Question

JRN Enterprises just announced that it plans to cut its dividend from $2.75 to $1.20 per share and use the extra funds to expand its operations. Prior to this announcement, JRN's dividends were expected to grow at 5% per year and JRN's stock was trading at $26.00 per share. With the new expansion, JRN's dividends are expected to grow at 10% 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:

A. 21.52

B. 49.31

C. 26

D. 11.35

Please show work

Explanation / Answer

Cost of Capital=r=(Div/P)+g=(2.75/26)+0.05 0.1558 Price=PV of new growing Dividend in perpetuity=DIV/(r-g) 1.20/(0.1558-0.10) 21.51

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