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    uncwally's Avatar
    uncwally Posts: 1, Reputation: 1
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    #1

    Dec 4, 2012, 09:25 PM
    Need help in Common Stock Valuation
    Dubai Metro’s stock price was at $100 per share when it announced that it will cut its dividends from $10 per share to $6 per share, with additional funds used for expansion. Prior to the dividend cut, Dubai Metro expected its dividends to grow at a 4% rate, but with the expansion, dividends are now expected to grow at 7%. How do you think Dubai Metro’s stock price will react to the announcement?
    ArcSine's Avatar
    ArcSine Posts: 969, Reputation: 106
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    #2

    Dec 5, 2012, 10:29 AM
    Use the given info along with the constant-growth model to determine the discount rate the market is using to derive the $100 share price.

    Then with that discount rate in hand use the constant-growth ("Gordon") model again to re-price the stock based on the new expectations for dividends and growth.

    Here's where you take over for the wrap-up.
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