Question
It was anticipated that Down-east Industries Incorporated would pay a cash dividend of $3.00 per share at the end of year 0 in problem 2.
It was anticipated that Down-east Industries Incorporated would pay a cash dividend of $3.00 per share at the end of year 0 in problem 2. The board of directors approved the suspending of dividends for year 0 and the suspension of dividends for the next 5 years as the company undertakes major expansion projects and reinvests all the earnings (100 percent retention ratio). The company anticipates the dividend that will be paid will be $7.00. Management expects that dividends will grow at a constant rate of 5 percent per year forever and investors require an 18 percent rate of return.
a.What is the expected price of the share today?Show your work! (3 marks)
b.Should Down-east Industries take on this project or continue on as per problem 2 - reject the new investment and pay the $3.00 dividend?Explain! (2 marks)
c.What is the minimum cash dividend the company will need to pay for the share to maintain its current market price as calculated in Problem 2?Show your work! (3 marks)
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