5 One way to value a share of equity is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is 1 minus

b, where b is the ‘retention’ or ‘ploughback’ ratio. So, the dividend next year will be the earnings next year, E1, times 1 minus the retention ratio. The most commonly used equation to calculate the sustainable growth rate is the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of a share of equity today:

P o  = 

E 1 (1 − b)

______ ___ _ R s  − ROE × b What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain.