Consider the model in section 5.6 (where debt is the plug).

a. Suppose that the firm has 1,000 shares and that it decides to pay, in year 1, a dividend per share of 15 cents. In addition, suppose that it wants this dividend per share to grow in subsequent years by 12% per year. Incorporate these changes into the pro forma model.

b. Do a sensitivity analysis in which you show the effect on the debt/equity ratio of the annual growth rate of dividends. Vary this rate from 0% to 18%, in steps of 2%. For this exercise, define debt as net debt (i.e., debt – cash and marketable securities). (Note that since the WACC = 20%, the growth rate must be less than 20%.)