Question
Green Gadgets Inc. is trying to decide whether to cut its expected dividend for next year from $ 8 per share to $5 per share
Green Gadgets Inc. is trying to decide whether to cut its expected dividend for next year from $ 8 per share to $5 per share in order to have more money to invest in new projects. If it does not cut the dividend, Green Gadgets' expected rate of growth in dividends is 5 percent per year and the price of their common stock will be $100 per share. However, if it cuts its dividend, the dividend growth rate is expected to rise to 8 percent in the future. Assuming that the investor's required rate of return for Green Gadgets' stock does not change, what would you expect to happen to the price of its common stock if it cuts the dividend to $5? Should Green Gadgets cut its dividend? Support your answer as best you can. a.What is the investor's required rate of return for Green Gadgets' stock?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started