Reference no: EM132421905

The dividend-growth model, 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 6 percent, so the current market price of the stock is $15.14. Management may make an investment that will increase the firm's growth rate to 9 percent, but the investment will require an increase in retained earnings, so the firm's dividend must be cut to $0.9 a share. Should management make the investment and reduce the dividend? Round your answer to the nearest cent.

The value of the stock (rises / declines) to (in $) , so the management ( should / should not ) make the investment and decrease the dividend.