Determine the change in stock price

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CEO took over the company 8 years ago the price was $120 per share. The company is an all equity firm that has a policy of paying out 85 percent of its earnings in dividends. Nell wants to increase the amount of money she plows back into the firm in order to grow the company. She expects the company to continue earning a 12 percent annual IRR on the capital they invest. Over the past 12 months, company paid $3.00 in dividends. Assume the effective annual discount rate for company is 12%. What is the impact on company's stock price if she increases the plowback ratio to 60% and keeps it there forever (i.e., how much value does the new investment plan create/destroy per share)?

The stock price will go up by at least 10%

The stock price will go up by less than 10%

The stock price will fall by at least 10%

The stock price will fall by less than 10%

The stock price will not change

There is not enough information to determine the change in stock price

Reference no: EM133071695

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