Reference no: EM133076121

Question - Creative Bamboo Ltd., a furniture company has earnings of $800,000 with 250,000 shares outstanding. Its P/E ratio is 16. The firm currently has $300,000 of funds to either invest in a new project, or pay out in the form of dividends. If the funds are retained and invested, the after-tax return on the Investment will be 20 percent, and this will add to present earnings. The 20 percent is the normal return anticipated for companies in the furniture Industry. If the funds are reinvested the company's P/E ratio would remain unchanged. If the funds are paid out in the form of dividends, however the P/E ratio would be revised to 15. Advise Creative Bamboo Ltd. on which course of action they should take, giving the reason for your recommendation.