Chapter 10, Problem 29P

Ecology Labs Inc. will pay a dividend of $\text{\$6}\text{.40}$ per share in the next 12 months $(D_1).$ The required rate of return $(K_e)$ is 14 percent and the constant growth rate is 5 percent.

a. Compute $P_0.$

(For parts $b,c,\text{and }d$ in this problem, all variables remain the same except the one specifically changed. Each question is independent of the others.)

b. Assume $K_e,$ the required rate of return, goes up to 18 percent. What will be the new value of $P_0?$

c. Assume the growth rate (g) goes up to 9 percent. What will be the new value of $P_0?$ $K_e$ goes back to its original value of 14 percent.

d. Assume $D_1$ is $\text{\$7}\text{.00}\text{.}$ What will be the new value of $P_0?$ Assume $K_e$ is at its original value of 14 percent and g goes back to its original value of 5 percent.