Lotte Group Is Planing on Diversifying into the Transportation Industry

Multiple Choice

Lotte Group is planing on diversifying into the transportation industry. As a result, Lotte's beta would rise to 1.3 from 1.1 and the expected long-term growth rate in the firm's earnings would increase from 11% to 14%. Currently the risk-free rate is 5.0% and the market risk premium is 8.6%. If Lotte's current dividend is $1.30, should Lotte diversify into the transportation industry?

A) No, stock price does not increase
B) No, stock price declines about $10.11
C) Yes, stock price increases about $19.42
D) Yes, stock price increases by about $26.27