Question $2$:

Nurta Pharmaceuticals current earnings per share is Rs$.20,$ which is distributed to its

shareholders. The required rate of return for the shareholders is $20\%,$ and the market price

of the share is Rs$.100.$ Nutra Pharmaceuticals has three business opportunities.

Option $1$ is to make a product that gives $25\%$ return,

Option $2$ is expansion of current product that would give $20\%,$

Option $3$ is to produce a product that would give $15\%$ return.

Assume all products are scale able, mutually exclusive and are funded only through equity.

To fund the projects, the only option is to reduce the dividend payout to $50\%,$ i$.$e dividend

would reduce from Rs$.20$ per share to Rs$.10$ per share. The retained part of the dividend

would be used to fund the selected project. Determine the growth rate $(g=b**ROE)$ for

each of the options and the new share price $($assuming constant growth$).$ Comment on the

new share price for each of the model.

$(10$ marks$)$