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Company XYZ is trying to decide whether to cut its expected dividends for next year from $10 per share to $4 per share in order
Company XYZ is trying to decide whether to cut its expected dividends for next year from $10 per share to $4 per share in order to have more money to invest in new projects. If it does not cut the dividend, the firm's expected rate of growth in dividends is 3 percent per year and the price of their common stock will be $200 per share. However, if it cuts its dividend, the dividend growth rate is expected to rise to 5 percent in the future. Assuming that the investor's required rate of return for the stock does not change, what would you expect to happen to the price of its common stock if it cuts the dividend to $4? Should the company XYZ cut its dividend? a) $133.33 ; Should not cut its dividend. b) $166.67 ; Should not cut its dividend. c) $122.41 : Should cut its dividend. d) $145.32 ; Should cut its dividend. e) $114.75; Should not cut its dividend. 6) You are considering two independent projects both of which have been assigned a discount rate of 11.5% percent. Based on the project NPV, what is your recommendation concerning these projects? Project A Project B Year Cash Flow Year Cash Flow -$91,850 -$45,000 $28,405 $38,500 $64.890 $17,325 a) You should accept both projects. b) You should reject both projects. c) You should accept project A and reject project B. d) You should accept project B and reject project A. e) You should accept project A and be indifferent to project B
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