$(3)$ ABC Enterprises is currently a no$-$growth firm with a policy to pay $100\%$ of its earnings on dividends. The

most recent earnings per share was $$6.$ The firm's common stock is selling at a market value of $$50$ per share.

Management is considering investment opportunities that will convert the firm into a growing firm. The management is

evaluating two alternative strategies, A and $B.$

Strategy A requires $60\%$ retention of the firm's earnings for $10$ years, $40\%$ retention for another $5$ years, after

which the firm is expected to grow at a steady rate indefinitely. This last stage will have $80\%$ dividend payout ratio.

Growth rate is expected to be $18\%$ during the first $10$ years, $8\%$ during the following $5$ years and $3\%$ thereafter.

Investors are expected to perceive this strategy to be $25\%$ riskier than the no$-$growth situation and in general the market

demands a risk free rate of $4\%.$

Strategy B requires $80\%$ retention of the firm's earnings for $15$ years and $25\%$ thereafter indefinitely. Growth

rate is expected to be $20\%$ for the first $15$ years and $4\%$ thereafter. This strategy is expected to make the firm's stock

$50\%$ riskier than the no$-$growth situation and the risk free rate is expected to stay constant at $4\%$ level indefinitely.

Which strategy will you advice the firm's management to take in order to make shareholders better off? Show

calculations to support your answer. $($Answer: Strategy A leads to a higher expected stock price. Strategy A expected

stock price is $$99\mathrm{.}25$ and strategy $B$ expected stock price is $$88\mathrm{.}71)$