This answer is the current share price plus the increase in the dividend. See the correct answer for an explanation. If the expected dividend increases, the share price should increase. Because the amount of the dividend is not expected to change after it increases, this is a perpetual annuity. We first need to calculate the current investors' rate of return on this perpetual annuity. The return is calculated as the annual dividend divided by the market value of the investment, or $.30 ÷ $2.50, which is 12%. Now that we know the investors' required rate of return, we can calculate what the share price would go up to if the annual dividend goes up to $.33, a new perpetual annuity,. The equation to solve is .33 / X = .12. Solving for X, we get a share price of $2.75. If the expected dividend increases, the share price should increase. If the expected dividend increases, the share price should increase.
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