Consider a company called "Opportunities, Inc", which has a required rate of return of 11%. The company has an option to engage in projects that could generate a ROE of 11%.

PART 1

Which of the following statements is true about the market value of the company?

a. The company can increase its value by increasing its plowback ratio.

b. The company can increase its value by increasing its dividend payout ratio.

c. The value of the company is not affected by the payout and earnings retention ratio.

d. The company can increase its value by decreasing its earnings retention ratio.

PART 2

Now suppose that the company has an option to engage in projects that generate a return on investments of 14%. Which of the following statements is true about the value of the company?

a. The company can increase its value by increasing its dividend payout ratio.

b. The company can increase its value by decreasing its plowback ratio.

c. The company can increase its value by increasing its earnings retention ratio.

d. The value of the company will not be affected by the dividend and earnings payout ratio.

e. If the company decides to decrease its dividend payout ratio, its share price should fall.The company can increase its value by decreasing its dividend payout ratio.