Question
M&M is considering an IPO in the coming days. It wonders about the adjustment of its dividend distribution policy as well as the rational price
M&M is considering an IPO in the coming days. It wonders about the adjustment of its dividend distribution policy as well as the rational price (at equilibrium) at which it will be able to sell its shares on the market according to the dividend policy adopted.
The beta (share) of the M&M company is 3; The risk-free rate on the market is equal to 3% and the expected return on the market is equal to 7%. M&M expects earnings per share of 10 this year.
The CFO of M&M hesitates between two strategies:
1. Pay a constant annual future dividend of 6 per share. The undistributed profit will be reinvested in new projects whose expected profitability is 22.5% per year.
2. Pay a constant annual future dividend of 9 per share. The undistributed profit will be reinvested in the same new projects whose expected profitability is 22.5% per year.
Calculate the increase/decrease in the share price (in ), if the M&M company adopts the 2nd strategy compared to the 1st dividend distribution strategy. Please note that the response to be provided must include the sign of the variation in the event of a drop. For example, for a decrease of 10, you would have to enter -10.
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