Delta Engineering Solutions $($DES$)$ manufactures products for the clean energy market such as

solar panels and wind turbines. It expects to have earnings per share of $$100$ in the coming

year Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings

as a dividend. DES$$ current share price is $$600.$ The management is examining the impact of

alternative payout policies.

Policy $1$: Suppose DES could cut its dividend payout rate to $60\%$ for the foreseeable future

and use the retained earnings to develop batteries for electric cars. The return on its investment

is expected to be $20\%.$

Policy $2$: Suppose DES could cut its dividend payout rate to $50\%$ for the foreseeable future

and use the retained earnings to develop aircraft engines $($turbines$)$ that run on hydrogen. The

return on its investment is expected to be $15\%.$

a$)$ If we assume that the risk of this new investment is the same as the risk of its existing

investments, then the firm$$s equity cost of capital is unchanged. What effect would

each of the above policies have on DES$$ stock price? $(7$ points$)$

b$)$ In the context of this question, is investing in all growth opportunities in the best

interest of the shareholder? Explain