Problem 11-09

The dividend-growth model,

suggests that an increase in the dividend growth rate will increase the value of a stock. However, an increase in the growth may require an increase in retained earnings and a reduction in the current dividend. Thus, management may be faced with a dilemma: current dividends versus future growth. As of now, investors required return is 11 percent. The current dividend is $0.9 a share and is expected to grow annually by 6 percent, so the current market price of the stock is $19.08. Management may make an investment that will increase the firms growth rate to 9 percent, but the investment will require an increase in retained earnings, so the firms dividend must be cut to $0.7 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent.

The value of the stock -Select-risesdeclinesItem 1 to $ , so the management -Select-should notshouldItem 3 make the investment and decrease the dividend.