Urban Utilities, Inc. has an outstanding common stock that is not growing. The firm has been paying an annual $4 dividend each year. No growth in this dividend payment is expected for the foreseeable future. Investors require an annual 8% rate of return on this stock, due to its risk level.
A. Given this information, calculate the market value per share of this firm’s outstanding common stock.
B. Now, assume that a large competitor enters the market, taking 20% of Urban Utilities’ market share. With this increase in risk, investors now require a 10% annual rate of return on Urban Utilities common stock. Given this information, calculate the market value per share of Urban Utilities’ common stock.