Question
A fairly priced unlevered firm plans to pay a dividend of $1 next year (t=1) which is expected to grow by 2% pa every year
A fairly priced unlevered firm plans to pay a dividend of $1 next year (t=1) which is expected to grow by 2% pa every year after that. The firm's required return on equity is 10% pa. The firm is thinking about increasing its future dividend payments by 15% by reducing spending on research and development projects which are expected to return 10% pa, and have the same risk as the existing projects. Therefore, next year's dividend will be $1.15. What will be the stock's new annual capital return (proportional increase in price per year) if the change in payout policy goes ahead? Assume that payout policy is irrelevant to firm value and that all rates are effective annual rates
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