Question: Ecology Labs, Inc., will pay a dividend of $3 per share in the next 12 months (D1). The required rate of return (Ke) is 10 percent and the constant growth rate is 5 percent.
a. Compute P0. (For parts b, c, 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 12 percent; what will be the new value of P 0 ?
c. Assume the growth rate (g) goes up to 7 percent; what will be the new value of P 0 ? K e goes back to its original value of 10 percent.
d. Assume D 1 is $3.50; what will be the new value of P0? Assume K e is at its original value of 10 percent and g goes back to its original value of 5 percent.