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Nurta Pharmaceuticals current earnings per share is Rs . 2 0 , which is distributed to its shareholders. The required rate of return for the

Nurta Pharmaceuticals current earnings per share is Rs.20, which is distributed to its
shareholders. The required rate of return for the shareholders is 20%, and the market price
of the share is Rs.100. Nutra Pharmaceuticals has three business opportunities.
Option 1 is to make a product that gives 25% return,
Option 2 is expansion of current product that would give 20%,
Option 3 is to produce a product that would give 15% return.
Assume all products are scale able, mutually exclusive and are funded only through equity.
To fund the projects, the only option is to reduce the dividend payout to 50%, i.e dividend
would reduce from Rs.20 per share to Rs.10 per share. The retained part of the dividend
would be used to fund the selected project. Determine the growth rate (g = b*ROE) for each of the options and the new share price (assuming constant growth). Comment on the new share price for each of the model.

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