Stock & dividend?

Question

3 . The stock of Robotic Atlanta Inc. is trading at $27.51 per share. In the past, the firm has paid a constant dividend of $5.67 per share and it has just paid an annual dividend (i.e., D0 = 5.67). However, the company will announce today new investments that the market did not know about. It is expected that with these new investments, the dividends will grow at 6.5% forever. Assuming that the discount rate remains the same, what will be the price of the stock after the announcement?(

Answer 1

P0 = 27.51

D0 = 5.67

g = 6.5%

D1 = (1+6.5%)*5.67 = 6.039

ROE = 5.67/27.51 = 20.61%

P=D1/(r-g)

P=6.039/(0.2061-0.065) = 42.79

This answer is based on the assumption that a rate of return on common equity is not provided. If it is, then replace that with the ROE value.