Question
Suppose the risk-free rate is 2% and the market return is 7%. SP Oil Co. currently has a steady business operating a refinery and has
Suppose the risk-free rate is 2% and the market return is 7%. SP Oil Co. currently has a steady business operating a refinery and has a beta of .6. Next year they will pay an annual dividend of $2 per share after which dividends will grow at 1% per year. They have an opportunity to develop a petroleum-based technology product that would allow them to triple their dividend growth rate; however, this new product line carries significantly more systematic risk and would increase their overall beta to 1.0. As a shareholder, do you want them to pursue this opportunity? Why?
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