Sunrise Ltd. is currently paying dividend of 1.50 on its face value of 10. Earnings and dividends are expected to grow at 5% annual rate indefinitely. Investors require 9% rate of return on their investments. The company is considering several business strategies and wishes to determine the effect to these strategies on the market price of its share.
(a) Continuing the present strategy will result in the expected growth rate and required rate of return as above.
(b) Expanding sales will increase the expected dividend growth rate to 7% but will increase the risk of the company. As a result, the investor’s required rate of return will increase to 12%.
(c) Integrating into retail stores will increase the dividend growth rate to 6 per cent and increase the required rate of return to 10 per cent.
You are required to find out the best strategy from the point of view of the market price.
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