An all$-$equity financed firm expects to have earnings per share of $$8$ in the coming year. Rather than reinvest these earnings and grow, the firm is expected to pay out all of its earnings as dividend. With these expectations of no growth, the firm$$s stock price is $$80.$

Suppose that the firm could cut its dividend payout rate to $75\%$ for the foreseeable future and use the retained earnings to grow its business. The return on these investments would be $12\%,$ meaning that every invested dollar results in a $$0\mathrm{.}12$ increase in annual earnings. The firm$$s cost of capital would not be affected by a decision to cut dividends and start investing in growth.

What would be the effect of cutting dividends and investing in growth on the firm$$s stock price?

Question: Select one:

Negative. The stock price would drop below $$80.$

No effect. The stock price would remain at $$80.$

Positive. The stock price would rise above $$80.$