Just yesterday, you expected that XYZ Inc. will generate a nice 8% annual return (measured as the total return on shares traded on the stock exchange) to its shareholders forever. However, today you woke up to the news that XYZ made an important cost-reducing discovery that gives it a competitive advantage over its competitors and doubles its annual profits and dividends for the next 5 years. Unfortunately, after five years, XYZ's competitors will catch up, and XYZ's profit will return to its normal level (the one it would have had without this discovery). Nothing else has changed. What can you say about the expected annual return R that XYZ will generate to its shareholders 3 years from now (i.e., between year 3 and 4). A) R>16% B) R=16% C) R=14.4% D) R=9.6% E) 8%

Just yesterday, you expected that XYZ Inc. will generate a nice 8% annual return (measured as the total return on shares traded on the stock exchange) to its shareholders forever. However, today you woke up to the news that XYZ made an important cost-reducing discovery that gives it a competitive advantage over its competitors and doubles its annual profits and dividends for the next 5 years. Unfortunately, after five years, XYZ's competitors will catch up, and XYZ's profit will return to its normal level (the one it would have had without this discovery). Nothing else has changed. What can you say about the expected annual return R that XYZ will generate to its shareholders 3 years from now (i.e., between year 3 and 4). A) R>16% B) R=16% C) R=14.4% D) R=9.6% E) 8%

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 25P

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