Problem 11-09 The dividendgrowth model, D 1 V: 0( +9) keg 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 new, investors' required return is 14 percent. The current dividend is $1.3 a share and is expected to grow annually by 6 percent, so the current market price of the stock is $17.23. Management may make an investment that will increase the firm's growth rate to 9 percent, but the investment will require an increase in retained earnings, so the rm's dividend must be cut to $1 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent. The value of the stock to $ , so the management make the investment and decrease the dividend. Problem 11-07 The security market line is estimated to be k=4% + (9.4% - 4%)5. You are considering two stocks. The beta ofA is 1.4. The firm offers a dividend yield during the year of 3 percent and a growth rate of 7.2 percent. The beta of B is 1.7. The rm offers a dividend yield during the year of 4.5 percent and a growth rate of 6.2 percent. a. What is the required return for each security? Round your answers to two decimal places. Stock A: % Stock B: % b. Why are the required rates of return different? The difference in the required rates of return is the result of being riskier. c. Since A offers higher potential growth, should it be purchased? Stock A be purchased. d. Since B offers higher dividend yield, should it be purchased? Stock B be purchased. e. Which stock(s) should be purchased? should be purchased