Firms A and B carry no debt, have the same current earnings before interest and taxes (EBIT = $1,000), have the same tax rate (%), and have the same non-levered cost of capital of 10%. However, their growth rates and dividend policies are dramatically different. Firm A retains 80% of its net income for future investment and its dividends grow (forever) at 8% per year. Firm B retains only 20% of its net income and its dividends grow at 4% per year.

Question a: Which firm is worth more?

Question b: Explain the intuition behind your answer at part (a) above.