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Timber company will pay a dividend of $2 a share next year. After this, earnings and dividends are expected to grow at a 10 p
Timber company will pay a dividend of $2 a share next year. After this, earnings and dividends are expected to grow at a 10 p ercent annual rate indefinitely. Investors c urrently require a rate of return of 15 perc ent. The company is considering several business strategies and wishes to determ ine the effect of these strategies on mark et price per share of its stock. a. Conti nuing the present strategy will result in th e expected growth rate of return stated a bove. b. Expanding timber holdings and s ales will increase the expected dividend g rowth rate to 11 percent but will increase the risk of the company. As a result, the r ate of return required by investors will inc rease to 19 percent. From the standpoint of market price per share, which strategy is best
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