Timber company will pay a dividend of $2 a share next year. After this, earnings...
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Timber company will pay a dividend of $2 a share next year. After this, earnings and dividends are expected to grow at a 10 percent annual rate indefinitely. Investors currently require a rate of return of 15 percent. The company is considering several business strategies and wishes to determine the effect of these strategies on market price per share of its stock. a. Continuing the present strategy will result in the expected growth rate of return stated above. b. Expanding timber holdings and sales will increase the expected dividend growth rate to 11 percent but will increase the risk of the company. As a result, the rate of return required by investors will increase to 19 percent. From the standpoint of market price per share, which strategy is best?
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