Mahlo Is Planning to Diversify into the Bakery Industry

question 34

Multiple Choice

Mahlo is planning to diversify into the bakery industry. As a result, its beta should drop from 1.4 to 1.2 and the expected long-term growth rate of dividends will drop from 12% to 9%. The risk-free rate is 4%, the expected market risk premium is 9%, and the current dividend per share paid by Mahlo is $2.10. Should Mahlo complete the diversification into the bakery industry?

• A) No, stock price drops about $11.70
• B) Yes, stock price increases about $9.40
• C) Yes, stock price increases about $1.80
• D) No, stock price drops about $9.40

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Definitions:

Gene

A unit of heredity that is transferred from a parent to offspring and is held to determine some characteristic of the offspring.

X Chromosome

One of the two sex chromosomes, X and Y, with the X chromosome carrying genes essential for the development of female physical characteristics and playing a role in male development as well.

Brain Development

The process by which the nervous system, including the brain, grows, matures, and learns, starting from before birth and continuing into adulthood.

Heritability

A statistical measure that indicates how much of the variation in a given trait within a population can be attributed to genetic differences among individuals.