Solar Inc. pays a current dividend of $2.50 per share annually. This dividend is expected to grow at the rate of 3.25% per year for the foreseeable future. Rating LLC has given Solar Inc. a beta score of 1.05. The risk-free rate of return is currently 1.25% and is expected to remain therefore some time. The current market rate of return is 5.625%.
Answer the following questions:
a. What price would you expect Solar Incorporated’s stock to sell?
b. If the risk-free rate of return increases to 3.5% and the market rate of return changes to 7.875%, what impact will that have on the expected price of Solar Inc.’s stock
c. Solar Inc. is anticipating a significant merger and acquisition to enhance their productivity and reduce their fixed costs. Asa result of this acquisition, management expects their beta to drop to .95.Their dividend growth rate is expected to increase to 4% and remain there indefinitely. Assuming that all other conditions used in “a” remain the same, would you recommend this acquisition to the board of directors?