Question: 5. Consider the model in section 3.7 (where debt is the plug). a. Suppose that the firm has 1,000 shares and that it decides to

5. Consider the model in section 3.7 (where debt is the plug).

a. Suppose that the firm has 1,000 shares and that it decides to pay, in year 1, a dividend per share of 15 cents. In addition, suppose that it wants this dividend per share to grow in subsequent years by 12 percent per year. Incorporate these changes into the pro forma model.

b. Do a sensitivity analysis in which you show the effect on the debt/equity ratio of the annual growth rate of dividends. Vary this rate from 0 percent to 18 percent, in steps of 2 percent. For this exercise, define debt as net debt (i.e., debt minus cash and marketable securities).

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