An all-equity company has 100,000 shares outstanding. The company has a perpetual annual earnings of $100,000 and follows a 100% payout policy. The current share price is $10 and the required return on common equity is 10%. The company needs $100,000 at the end of the next year for an investment project which is expected to generate $10,000 per year in future. The company has two alternatives to finance the investment outlay:

1.Maintain the 100% payout policy and issue $100,000 worth of new shares.

2.Omit the next years dividends and finance the investment with that amount.

Compute the current share price under the two alternatives