Problem 11-09

select (rise or decline)---(should or should not)

"? Cengage Digital Learning MindTap - Cengage Lea X Course Hero + X O A https:/g.cengage.com/staticb/ui/evo/index.html?deploymentld=59440722375013485425961657319&eISBN=9781337403047&nbid=1826168&snapshotk (!!] > CENGAGE |MINDTAP Q Search this course ? Ch 11: End-of-Chapter Problems - Stock Valuation X Attempts: Average: / 3 E 9. Problem 11-09 A-Z eBook Problem 11-09 The dividend-growth model, V = - Do (1 + 9) k - g suggests that an increase in the dividend growth rate will increase the value of a stock. However, an increase in the growth may require an increase in retained earnings and a reduction in the ? current dividend. Thus, management may be faced with a dilemma: current dividends versus future growth. As of now, investors' required return is 11 percent. The current dividend is $1.3 a share and is expected to grow annually by 4 percent, so the current market price of the stock is $19.31. Management may make an investment that will increase the firm's growth rate to 8 percent, but the investment will require an increase in retained earnings, so the firm's dividend must be cut to $0.9 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent. The value of the stock -Select- v to $ , so the management -Select- ~|make the investment and decrease the dividend. Grade it Now Save & Continue Continue without saving O Type here to search e L 9:19 PM 9/13/2020