Pittsburgh & West Virginia Railroad (PW) expects to have earnings per share of $0.48 in the coming year. Rather than reinvest these earnings and grow, the firm plans to pay out all of its earnings as a dividend. With these expectations of no growth, PWs current share price is $10. Suppose PW could cut its dividend payout rate to 67% for the foreseeable future and use the retained earnings to expand. The return on investment in the expansion is expected to be 11%. If we assume that the risk of these new investments is the same as the risk of its existing investments, then the firms equity cost of capital is unchanged. What effect would this new policy have on PWs stock price?

Solve in Excel