7. Dividend reinvestment plans [LO 17.1] The DRK Limited has recently developed a dividend reinvestment plan or DRP. The plan allows investors to reinvest cash dividends automatically in DRK in exchange for new shares. Over time, investors in DRK will be able to build their holdings by reinvesting dividends to purchase additional shares of the company. A large number of companies offer dividend reinvestment plans. Most companies with DRPs charge no brokerage or service fees. In fact, the shares of DRK will be purchased at a 10 per cent discount from the market price. A consultant for DRK estimates that about 75 per cent of DRK’s shareholders will take part in this plan. This is somewhat higher than the average. Evaluate DRK’s dividend reinvestment plan. Will it increase shareholder wealth?

Discuss the advantages and disadvantages involved here.