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

Question:

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 10p and will grow by 9 per cent per annum thereafter due to the benefits from the investment. The company is focused on shareholder wealth maximization and requires a rate of return of 13 per cent for its owners.
Required
a. If the directors chose to ignore the investment opportunity and dividends continued to grow 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?