Your company has steady earnings of $4/share, no retained earnings, and is currently selling for $40/share. A junior executive has suggested that you reduce the dividend by half and invest the retained earnings in new projects that will return the same ROE as the firm’s current assets, 16%. Assuming these additional new projects that will pay a return equal to the current ROE, is this a good idea? Prove your answer. Please show all work and do not use excel or a finance calculator.

Answer rating: 100% (QA)

Solution Indeed this is a superior thought since project is returning a return of practicall... View the full answer