Dunlop Ltd., a manufacturing company has earnings of $600,000 with 300,000 shares outstanding. Its P/E ratio is 20. The firm currently has $400,000 of funds to either invest in a new project, or pay out in the form of dividends. If the funds are retained and invested, the after-tax return on the investment will be 16 percent, and this will add to present earnings. The 16 percent is the normal return anticipated for companies in the manufacturing industry. If the funds are reinvested the company's P/E ratio would remain unchanged. If the funds are paid out in the form of dividends, however the P/E ratio would be revised to 18. Advise Dunlop Ltd on which course of action they should take, giving the reason for your recommendation. (Show all calculations to support your recommendation.) Short Answer Toolbar navigation B I U S = =