Suppose American Workers Appliance Company's management conducted a study and concluded that if it expands its consumers products division (which is less riskay than its primary business, industrial chemicals), it's beta will decline from 1.2 to 0.9. However, consumer products have a somewhat lower profit margins, and this would cause its constant growth rate in earnings and dividends to fall from 6% to 4%. The following also apply. rM=9%, rRF=6% and D0=$2.00

A.) Should management expand the consumer product division? Explain.

B.) Assume all the facts given the change in the beta coefficient. How low would the beta have to fall to cause the expansion to be a good one? (Hint: Set Pq, under the new policy equal to P0 under the old one, and find the new beta that will produce this equality.)