What effect would new policy have on lengefeld stock price

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Reference no: EM131967740

Suppose Lengefeld could cut its dividend payout rate to 50% for the foreseeable future and use the retained earnings to open an additional factory. The return on investment in the new factory is expected to be 15%. If we assume that the risk of the new factory is the same as the risk of its existing factories, then the firm’s equity cost of capital is unchanged.

• What effect would this new policy have on Lengefeld’s stock price?

• Suppose Lengefeld Manufacturing decides to cut its dividend payout rate to 50% to invest in new stores, as in Example 7.3b. But now suppose that the return on these new investments is 8%, rather than 15%.

• Given its expected earnings per share this year of $2 and its equity cost of capital of 8.33% (we again assume that the risk of the new investments is the same as its existing investments), what will happen to Lengefeld’s current share price in this case?

Reference no: EM131967740

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