Determine the effect of these strategies on the market price

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Question - Passion Frost Inc. will pay a dividend of P1.50 a share next year. After this, earnings and dividends are expected to grow at a 9% annual rate indefinitely. Investors currently require a rate of return of 13%. The company is considering several business strategies and wishes to determine the effect of these strategies on the market price per share of its stock.

1. Continuing the present strategy will result in the expected growth rate and required rate of return stated above.

2. Expanding timber holdings and sales will increase the expected dividend growth rate to 11% but will increase the risk of the company. As a result, the rate of return required by investors will increase to 16%.

3. Integrating into retail stores will increase the dividend growth rate to 10% and increase the required rate of return to 14%.

Question - From the standpoint of market price per share, which strategy is best? Why?

Reference no: EM132786610

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