HDTV has planned on diversifying into the dual-VCR field.As a result, HDTV's beta would rise to 1.6 from 1.2 and the expected future long-term growth rate in the firm's earnings would increase from 12% to 16%.The expected market return, km, is 14%;the risk free rate, rf, is 7%;and the current dividend, Do, is $0.50.Should HDTV go into the dual-VCR field?
A)No-stock price decrease $7.82
B)Yes-stock price increase $9.89
C)Yes-stock price increase $3.81
D)No-stock price decrease $3.78

Question

Quizplus · Accepted Answer

kₒld = .07 + 1.2(.14 - .07) = .154
knₑw = .07 + 1.6(.07) = .182
Pₒ = .50(1.12)/(.154 - .12) = $16.47
Pn = .50(1.16)/(.182 - .16) = $26.36

HDTV Has Planned on Diversifying into the Dual-VCR Field