A firm has the following income statement for the past full year of operation:

Revenue 3,000,000

Expense 1,500,000

EBIT 1,500,000

Interest and taxes 500,000

Net Income 1,000,000

a. If the corporation is expected to have this same income statement forever and it pays out all the net income annually as dividends, what is the value of the firm if you are using the dividend discount model and the cost of equity is 10%?

b. Explain one reason why the management of a firm would pay out less than 100% of the net income as dividends and describe how that decision would impact the value of the company and why it has this impact.