1. Pattys Pub Inc currently expects earnings of $2.90, a payout ratio of 100%, and no expected growth in earnings. The current share price is $58.59. The managers, after much debate, are considering lowering the dividend to $2 and reinvesting the remainder in a new investment opportunity based on merchandizing. The return on this new investment is expected to be 7.5%.
   1. What is the firms equity cost of capital?
   2. Under the new project, what is the firms retention ratio? Payout ratio?
   3. Given the new project, what is the share price for the firm? Assume they firm maintains the payout ratio from part b and the new investment project is just as risky as the firm and so no change in the equity cost of capital.
   4. Will the project increase the wealth of shareholders?