For parts f and g, suppose that you buy one share of each stock at t=0 at the price calculated in part a for that stock. Immediately after you buy the shares, each company announces that it plans to increase the dividend in one year by $1, from $6.3 to $7.3 per share. So each firm will increase its payout ratio for next year. Moreover, each firm will then maintain the new payout ratio constant forever. The ROE for each firm will remain the same as with the initial reinvestment policy. The dividend increases are announced at t=0.

6. (3 points) Calculate the stock price for each firm at t=0, after the new reinvestment policy is announced.

7. (3 points) Are you better off with the new reinvestment policy (corresponding to the $7.3 dividend per share), or with the initial reinvestment policy (corresponding to the $6.3 dividend per share)? Answer this question for each firm separately. Briefly motivate your answers (2 sentences at most for each firm).

Please show work!

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