In mid-December 2001, Jim Vala has another meeting with Bill Jones.

During the meeting, Jones says:

As you know, Jones Group has recently divested DCom. At the time of that transaction, we signed a 20-year lease that gives DCom access to our pipeline property. We have just been informed that, as a result of current market conditions, DCom will default on the lease payment. We need that cash to service the debt that was retained by Jones Group at the time of the divestiture.

Jones continues:

We should consider a new dividend policy to conserve cash. Dividends per share will total $1.65 in 2001. I think we should reduce our dividend by 40 percent and maintain that lower level for 2002 and 2003 to allow us to pay off some debt. In 2004, we will increase our dividend back to $1.65, then growth the dividend at 5 percent annually thereafter.

The required rate of return on Jones Group equity is 10 percent for the foreseeable future.

Calculate, using a dividend discount model (DDM) approach, the expected share price of Jones Group equity on January 1, 2002, given the new dividend policy described by Jones. Show your calculations.

Exhibit 1-3 Dcom Corp Summary Income Statement and Balance Sheet (U.S. m ons, except per share data) December. 31 2001 2002 2000 2003 Summary Income Statement (for the year) Actual Projection Projection Projection 70.00 105.00 15 $236.25 Total Revenue 15.23 22.84 34.26 51.39 Total Operating Expenses Earnings Before Interest, Taxes 54.78 82.16 123.25 184.87 Depreciation & Amortization (EBITDA) 69.00 129.00 S 136.50 S 144.00 Depreciation and Amortization (14.23) (46.84) (13.26) 40.87 Earnings Before Interest & Taxes (EBIT) s 66.15 s 118.80 S 131.63 S 131.63 Interest Expense (80.38) S (165.64) (144.88) (90.76 Pre-Tax Income (22.07) S (44.66) S (40.58) S (29.48 Income Tax Expense (58.31) (120.98) (104.30) (61.28) Net Income 2001 2002 2003 2000 Summary Balance Sheet (year end) Actual Projection Projection Projection 113.12 130.93 222.07 S 253.75 Total Current Assets 391.00 S 662.00 S 575.50 S 481.50 504.12 792.93 797.57 735.25 Net Fixed Assets Total Assets 5.60 8.63 12.95 19.42 Total Current Liabilities $490.00 S 880.00 S 975.00 S 975.00 $495.60 888.63 987.95 994.42 Long-term Debt Total Liabilities 60.00 60.00 S 60.00 S 60.00 Common Stock (51.49) (155.70) (250.38) S (319.17) Retained Earnings 8.51 (95.70) (190.38) (259.17) 504.11 S 792.93 S 797.57 S 735.25 Total Shareholder's Equity Total Liabilities and Equity Dividends 300.00 75.00 S 75.00 Capital Expenditures 10.38 (8.64) (12.94) Changes in Working Capital (excluding cash and short-term debt)