Derive the discount rates after the changes

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Assume a firm will pay 10 in dividends next year, and these dividends will increase 2% per year.

1) For external reasons, the discount rates in the economy went down by 100 basis points. This increased the value of the firm by 50. Derive the discount rates after the changes.

2) The president of the company was disappointed by the slow growth of the FIrm. He decides to increase the share of earnings that is reinvested, from 50% to 75% (so dividend payout ratio was 50% before, and became 25% after). Calculate new firm value, using the discount rates after changes in 1).

Reference no: EM133114563

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