IT3 5 Scott Manufacturing is a firm in the machinetoolcompon

IT3 5. Scott Manufacturing is a firm in the machine-tool-component industry. The firm\'s most recent common-stock dividend was $2.10 per share. Due to its stable sales and earnings, the firms management feels that the dividends will remain at the current level for the foreseeable future. a. If the required return is 8%, what is the value of the common stock ?_ b. If the firm\'s risk increases, causing the required return to rise to 139%, what will be the common stocks value?

Solution

a) Calculation of Value of stock: Dividend= $2.10 Required return= 8% Stock price= Dividend/required return                       =2.10/0.08= 26.25 Value of stock is $26.25 b) Calculation of Value of stock: Dividend= $2.10 Required return= 13% Stock price= Dividend/required return                       =2.10/0.13= 16.15 Value of stock is $16.15