QUESTION $4$

A$.$ Dren Industries is considering expanding into a new product line. Earnings per share are expected to be $$5$ in the coming year and are expected to grow annually at $5\%$ without the new product line but growth would increase to $7\%$ if the new product line is introduced. To finance the expansion, Dren would need to cut its dividend payout ratio from $80\%$ to $50\%.$ If Dren's equity cost of capital is $11\%,$ what would be the impact on Dren's stock price if they introduce the new product line? Assume the equity cost of capital will remain unchanged. $(6$ marks$)$

B$.$ At the end of $2019,$ Newerks Inc. forecasts that its free cash flow will be $$50$ million in $2020,$$$60$ million in $2021,$ and $$72$ million in $2022.$ After $2022,$ Newerks expects its free cash flow earnings to grow at an annual rate of $6\%.$

Newerks has $$75$ million in debt and $$25$ million in cash. If Newerks has $5$ million shares outstanding and a cost of capital of $14\%,$ what is Newerks stock price at the end of $2019?(6$ marks$)$

c$.$ Explain four reasons why companies would want to merge. $(5$ marks$)$

D$.$ Explain three limitations of using the Payback Period as an investment decision tool $(3$ marks$)$