Question

At Newton Space plc, the company's director mentioned that the utilisation of dividend discount models by investors is evidence that larger dividends result in equity prices which are higher.

Required:

(a)Based upon a constant-growth dividend discount model, evaluate the director's statement.

(b)Explain how a dividend payout increase will influence the following (ceteris peribus):

(i)Growth rate which is sustainable(ii)Book value which grows