No Growth Limited is a stable business with no growth plans. It generates an EPS of Rs15. Since there is no growth plan, it gives out all of this as dividend.

a. You expect that this dividend will continue for ever. You expect a return of 18% from a stable company such as this. What is the price that you will be willing to pay for the stock?

b. With change of management, the company decides that it will only pay 50% of the EPS as dividend and reinvest the remaining amount in a new business that will lead to a 12% p.a. growth in earnings for the foreseeable future. What will be the price of the stock now?

c. However, the new business was not performing as expected. In light of the higher risk, investors now wanted a higher return of 24%. How will the price react to this news?

Answer rating: 100% (QA)

a If you expect a return of 18 and the company is expected to continue to pay out all its earnings a... View the full answer