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Red Corporations most recent dividend was $3 per share; its expected annual rate of dividend...

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Finance

Red Corporations most recent dividend was $3 per share; its expected annual rate of dividend growth is 5%, and the required return is now 15%. Management is considering a variety of proposals to redirect the firms activities. Determine the impact on share price for each of the following proposed actions and indicate the best alternative to maximize shareholders' wealth and why.
(2 Marks)
i. Eliminate an unprofitable product line, which will increase the dividend growth rate to 7% and raise the required return to 17%.
ii. Invest in a new machine that will increase the dividend growth rate to 6% and lower the required return to 14%.
B. Briefly explain at least two reasons why you would consider using the P/E multiples approach over the dividend growth model in common stock valuation.
(2 Marks)

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