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Investment = purchases of new plant and equipment

investment= purchases of new plant and equipment

dividend payout rate = proportion of net income (= earnings) paid out in dividends

retention rate = proportion of net income(=earnings) retained (to use to buy plant and equipment)

change in earnings = (retention rate) x (return on new investment)

dividend =(dividend payout rate) x (earnings (= net income)). Use the following information to answer question 1. Your firm's earnings are initially $20, and the dividend payout rate is initially .70 (so that the retention rate is initially .30 = 1 - .70). Your firm's growth rate is initially .01. Your initial share price is $100. You reduce the dividend payouut rate to .60 (so that the retention rate increases to .40 =1 - .60. What is the initial dividend and the initial r, before you reduce the dividend payout rate .

	a.	Dividend = $20, r = .30
	b.	Dividend = $10, r = .20
	c.	Dividend =$14, r =.15
	d.	none of these

Find the growth rate, g, and the share price after the decrease in the dividend payout rate

	a.	g =.20, new share price = $120
	b.	g = .40, new share price = $150
	c.	g =.045, new share price = $133.33
	d.	none of these

Suppose that you have the same starting situation as you had in question 1. Now (without changing the dividend payout rate) you decide to try to boost the price of your stock by increasing the rate of return on new investment from .15 to .30. Use this information to answer questions 3 and 4. Find the initial dividend and the initial r

	a.	Initial dividend = $20, initial r = .30
	b.	Initial dividend = $10, initial r = .20
	c.	Initial dividend = $14, initial r = .15
	d.	None of these

Find the growth rate and the share price after the increase in the rate of return on net investment.

	a.	g = .045, new share price = $72
	b.	g = .045,new share price=$96
	c.	g =.09, new share price = $233.33
	d.	None of these

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