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.
a) Determine the value of the stock if the required rate of return on stocks of similar risk is 15 percent.
b) If analysts believe the risk premium on the stock should be reduced by 2-percentage point, what is the new required rate of return on the French Thaler and Company stock? But how much should its price change from the answer you computer in part a?