Nahanni Treasures Corporation Is Planning a New Common Stock Issue

question 43

Multiple Choice

Nahanni Treasures Corporation is planning a new common stock issue of five million shares to fund a new project. The increase in shares will bring to 25 million the number of shares outstanding.Nahanni's long-term growth rate is 6 percent, and its current required rate of return is 12.6 percent.The firm just paid a $1.00 dividend and the stock sells for $16.06 in the market.On the announcement of the new equity issue, the firm's stock price dropped.Nahanni estimates that the company's growth rate will increase to 6.5 percent with the new project, but since the project is riskier than average, the firm's cost of capital will increase to 13.5 percent.Using the DDM constant growth model, what is the change in the equilibrium stock price?

• A)−$1.77
• B)−$1.06
• C)−$0.85
• D)−$0.66
• E)−$0.08

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Definitions:

Dimethyl Ether

A colorless gas used as an aerosol propellant and a clean fuel, with the formula \(CH_3OCH_3\), also known as methoxymethane.

London Forces

Weak intermolecular forces, also known as dispersion forces, arising from instantaneous dipoles in molecules, influential in nonpolar compounds.

Sodium Chloride

Sodium chloride is a chemical compound also known as table salt, formed from the ionic bonding of sodium and chlorine atoms.

Organic Solvent

A liquid substance capable of dissolving other substances; usually organic compounds that are not water.