Philips plc has just paid a dividend of 10p per share. Next years dividend is expected to be 30% higher and thereafter dividends are expected to grow at a rate of 5% per annum. The cost of capital for Philips is 9%. The management of the company is faced with an investment opportunity which will require dividends to be reduced to 5p next year and then thereafter dividends will be as follows: 10p at the end of year 2; 10p at the end of year 3; 10p at the end of year 4; 23p at the end of year 5; Dividends will then grow at 7% per annum. However, the market believes that the new investment increases the riskiness of Philips plc with the result that the cost of equity capital rises to 12%. Assume that the market is strong form efficient. Consider the following statements: I. If a decision is taken now to go ahead with the investment the current share price and the share price after 4 years will both be lower. II. If a decision is taken now to go ahead with the investment the current share price will be higher and the share price after 4 years will be lower. III. If a decision is taken now to go ahead with the investment the current share price will be lower and the share price after 4 years will be higher. Which of the following is correct?

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a

I is correct and the company should not go ahead with the investment

b

II is correct and the company should go ahead with the investment

c

II is correct and the company should not go ahead with the investment

d

III is correct and the company should go ahead with the investment

e

III is correct and the company should not go ahead with the investment