Question
The company DO & CO is considering expansion into a new product line. The benefit per share is 5 this year and is expected to
The company DO & CO is considering expansion into a new product line. The benefit per share is 5 this year and is expected to grow by 5% each year without the new range of products. However, growth would increase to 7% if the new product line is introduced. In order to finance the expansion, DO & CO would need to reduce its ratio of distribution of dividends from 80% to 50%. If DO & CO's cost of equity is 11%, what would be the impact of the introduction of the new product range on the price of actions of DO & CO? It is assumed that the cost of equity remains unchanged.
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