Micromatic is considering expanding into a new product area.Micromatic's current beta is 1.2 and its beta is expected to increase to 1.45 after the expansion.The long-term growth rate of the firm's earnings is expected to increase from 6.5 percent to 10 percent.Micromatic's current dividend is $1.70 per share, the current risk-free rate is 9.1 percent, and the expected market return is 12.9 percent.Should Micromatic undertake the planned expansion?
A)No, stock price decreases $10.15
B)Yes, stock price increases $15.27
C)Yes, stock price increases $0.45
D)No, stock price decreases $15.27

Question

Quizplus · Accepted Answer

Current kₑ = 0.091 + 1.2(0.129 - 0.091) = 0.1366 or 13.66%
Current P = $1.70(1.065)/(0.1366 - 0.065) = $25.29
New kₑ = 0.091 + 1.45(0.129 - 0.091) = 0.1461
New P = $1.70(1.10)/(0.1461 - 0.10) = $40.56

Micromatic Is Considering Expanding into a New Product Area