2. a. Lindsell Products recently paid a dividend of $0.80/share. Its beta estimate is 0.8, and its expected dividend growth rate is 5%. Find investorsâ required rate of return for this stock, and the stockâs current stock price, if the risk free rate of return is 2%, and the market risk premium is 7%.
b. Now suppose that the management of Lindsell is considering expanding into foreign markets. This planned acquisition is expected to increase the future growth rate of the dividend from its original 5% level, to a new level of 8%. However, because revenues from foreign markets are subject to currency-related swings and more uncertain demand conditions, this change of strategy is expected to raise the firm's beta value to 1.1. Should investors buy more of this stock, or sell their current shares, when they learn about this planned expansion? Explain your answer.
2. a. Lindsell Products recently paid a dividend of $0.80/share. Its beta estimate is 0.8, and its expected dividend growth rate is 5%. Find investorsâ required rate of return for this stock, and the stockâs current stock price, if the risk free rate of return is 2%, and the market risk premium is 7%.
b. Now suppose that the management of Lindsell is considering expanding into foreign markets. This planned acquisition is expected to increase the future growth rate of the dividend from its original 5% level, to a new level of 8%. However, because revenues from foreign markets are subject to currency-related swings and more uncertain demand conditions, this change of strategy is expected to raise the firm's beta value to 1.1. Should investors buy more of this stock, or sell their current shares, when they learn about this planned expansion? Explain your answer.
