Part A. You own 100 shares of stock in Chips Off the Block, a potato chip manufacturing company. It has paid the same yearly dividend, equal to 100% of free cash flow, for years, and is expected to continue doing so indefinitely. You received your most recent dividend this morning. This afternoon, the company's management announces that it has reached an agreement to merge with Overweight Industries, a food conglomerate. Overweight's management has developed a patented potato chip production process that it believes will, if adopted, produce a permanent 10% increase in Chips' free cash flow (a one-time increase of 10%, not an increase of 10% per year). Adopting the new process will not change the riskiness of Chips' business. The market discount rate for stocks with the risk of Chips Off the Block is 10%. Chips stock sold, just after it paid this morning's dividend, for $100.

a. What is the per share dividend you received this morning?

b. What is the most that Overweight should be willing to pay per Chips share?

Part B. Same facts as the Part A, except that Overweight has just cancelled its merger plans because it discovered during due diligence that its new process is incompatible with the special sauce that Chips uses to flavor its potato chips. Just when you are bemoaning this stroke of bad luck, Chips' managers announce that they plan to cut their dividend in half, and plow back half of its total cash flow into developing a new garlic potato chip. The product will take three years to develop, after which sales will increase, so that Chips will have total free cash flow, starting in 4 years, that is 20% higher than without the new chips (a one-time increase of 20%, not an increase of 20% per year). Chips will then return, beginning in year 4, to paying out 100% of its free cash flow as dividends. What should Chips' stock price be immediately after this announcement?