The dividend growth model, V D0(1 g) 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 13 percent The current dividend is $1 a share and is expected to grow annually by 7 percent, so the current market price of the stock is $17 80 Management may make an investment that will increase the firms growth rate to 10 percent, but the investment will require an increase in retained earnings, so the firms dividend must be cut to $0 60 a share Should management make the investment and reduce the dividend

Question: The dividend-growth model, V = D0(1+ g) / k - g , Suggests that an increase in the dividend growth rate will increase the value

The dividend-growth model,
V = D0(1+ g) / k - g ,
Suggests that an increase in the 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 Thus, management may be faced with a dilemma: current dividends versus future growth. As of now, investors’ required return is 13 percent.
The current is $1 a share and is expected to grow annually by 7 percent, so the current market price of the stock is $17.80. Management may make an investment that will increase the firm’s growth rate to 10 percent, but the investment will require an increase in retained earnings, so the firm’s must be cut to $0.60 a share. Should management make the investment and reduce the

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