tesford plc has estimated net cash flows from operation after interest a Question $2$

Guff plc$,$ an all equity firm, has the following earnings per share and dividend history $($paid annually$).$

This year's dividend has just been paid and the next is due in one$-$year. Guff has an opportunity to

invest in a new product, Stuff, during the next two years. The directors are considering cutting the

dividend to $4p$ for each of the next two years to fund the project. However, the dividend in three

years can be raised to $10$ p and will grow by $9\%$ per annum thereafter due to the benefits from the

investment. The company is focused on shareholder wealth maximisation and required a rate of

return of $13\%$ for its owners.

Required

a$)$ If the directors chose to ignore the investment opportunity and dividends continued to from

at the historical rate what would be the value of one share using the dividend valuation

model?

b$)$ If the investment is accepted, and therefore dividends are cut for the next two years, what

will be the value of one share?

c$)$ What are the dangers associated with dividend cuts and how might the firm alleviate them?