Milton glasses recently paid a dividend of $1.70 per share, is currently expected to grow at a constant rate of 5%, and has a required return of 11%. milton glasses has been approached to buy a new company. milton estimates if it buys the company, its constant growth rate would increase to 6.5%, but the firm would also be riskier, therefore increasing the required return of the company to 12%. should milton go ahead with the purchase of the new company?

Milton should buy the company

Explanation:

Comparing the intrinsic value of the company in both scenarios using the Gordon Growth Model we get:

PV = [D0 * (1 + g)] / (r - g) where

D0 is current dividend

g = growth rate

r = required rate of return

Case 1 = current

PV = 1.7 * (1 + 0.05) / (0.11 - 0.05)

PV = 29.75

Case 2 = buying company

PV = 1.7 * ( 1 + 0.065) / ( 0.12 - 0.065)

PV = 32.92

The present value of the share when buying the company is higher than the current present value, therefore Milton should go ahead buying the company.

the clients (funders) and customers (individual nonprofit staff) are great to work with. that i can be open about being a person of faith when appropriate. the variety of my tasks each day.