The French Thaler and Company"s stock has paid dividends of $1.60 over the past 12 months. Its historical growth rate of dividends has been 8 percent, but analysts expect the growth to slow to 5 percent annually for the foreseeable future.
- Determine the value of the stock if the required rate of return on stocks of similar risk is 15 percent.
- If analysts believe the risk premium on the stock should be reduced by 2 percentage points, what is the new required rate of return on French Thaler and Company stock? How much should its price change from the answer you computed in part (a)?