Question

(Measuring growth) Green Gadgets Inc. is trying to decide whether to cut its expected dividend for next year from $10 per share to $7 per share in order to have more money to invest in new projects. It does not cut the dividend Green Gadgets expected rate of growth individends is 5 percent per year and the price of the common stock will be 59 per share. However, it cuts is dividend the dividend growth rate is expected to the toll percent in the future. Assuming that the investor's required rate of reborn for Green Gadgets stock does not change what would you expect to happen to the price of its common stock cuts the dividend to 377 Should Green Gadgets out dividend? Support your answer as best you can What is the investor's required rate of return for Green Gadget' stock? (Round to we decimal places) b. Assuming that the investors required rate of return for Green Gadgetwock does not change what would you expect to happen to the police of a common stock if it cuts the dividend to s Round to the newest cont) c. Should Geo Gadgets cut is dividend? (Select from the drop down menus) Green Gadge cut the dividend because cutting the dividend will the value of the common stock

Answer 1

Stock Price = Expected Dividend/(Required return - growth rate)

90 = 10/(Required return - 5%)

Required return = 16.11%

b.Price = 7/(16.11%-8%)

= $86.31

c.Should not cut

Reduce the value of stock