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Maintaining the present share price

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Question: A firm's 500,000 common shares have a market value of $60 per share. All earnings have been paid out in dividends, which have been constant at $3.60 per year. The firm considers retaining the next 2 years' dividends to finance an expansion that would yield a perpetual after-tax return of $250,000 per year, beginning in year 3. How would this affect the firm's share price, assuming all subsequent earnings are again paid out in dividends? What is the minimum yield the investment would have to provide in order to maintain the present share price of $60?

Reference no: EM131750478

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