Suppose Lengefeld could cut its dividend payout rate to 50% for the foreseeable future and use the retained earnings to open an additional factory. The return on investment in the new factory is expected to be 15%. If we assume that the risk of the new factory is the same as the risk of its existing factories, then the firms equity cost of capital is unchanged. What effect would this new policy have on Lengefelds stock price?

Suppose Lengefeld Manufacturing decides to cut its dividend payout rate to 50% to invest in new stores, as in Example 7.3b. But now suppose that the return on these new investments is 8%, rather than 15%. Given its expected earnings per share this year of $2 and its equity cost of capital of 8.33% (we again assume that the risk of the new investments is the same as its existing investments), what will happen to Lengefelds current share price in this case?