If we assume that the two changes illustrated for Lamar Company in the preceding e0xamples occur…

If we assume that the two changes illustrated for Lamar Company in the preceding e0xamples occur simultaneously, key variable values would be D1=$1.50, ks=0.16, and g=0.09. Substituting into the valuation model, we obtain a share price of $21.43 [$1.50÷ (0.16-0.09)]. The net result of the decision, which increased return (g, from 7% to 9%) as well as risk (b, from 1.50 to 1.75 and therefore ks from 15% to 16%), is positive: The share price increased from $18.75 to $21.43. The decision appears to be in the best interest of the firm’s owners, because it increases their wealth.

 

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