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You should use Alpha Corporation has just paid its annual dividend and is looking forward to another successful year ahead. The company had free cash
You should use Alpha Corporation has just paid its annual dividend and is looking forward to another successful year ahead. The company had free cash flow for the year just ended of $100 billion, all of which it just paid out to its shareholders as a dividend. Right now, shareholders do not believe that Alpha has any growth opportunities, so they expect the annual cash flow and dividend stream to remain unchanged for the foreseeable future. Alpha has 10 billion shares outstanding. The company is entirely equity-financed. The cost of equity for the company is estimated to be 20%. The capital market is efficient and there is no tax. Q21. Alpha's CEO proposes that the company skip its dividend one year from now and instead invest the entire amount of the coming year's $100 billion cash flow in a project that management believes will generate a perpetual annual rate of of 20%. The CEO further asserts that the new project has similar risk to the company's asset in place. If the company were to announce immediately its plans for the investment one year from now (Financed by skipping next year's dividend) what will happen to Alpha's stock price today
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