Should green gadgets cut its dividend

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Reference no: EM131575648

(Measuring growth) Green Gadgets Inc. is trying to decide whether to cut its expected dividend for next year from $10 per share to $7 per share in order to have more money to invest in new projects. If it does not cut the dividend, Green Gadgets' expected rate of growth in dividends is 5% per year and the price of their common stock will be $110 per share. However, if it cuts its dividend, the dividend growth rate is expected to rise to 8% in the future. Assuming that the investor's required rate of return for Green? Gadgets' stock does not change, what would you expect to happen to the price of its common stock if it cuts the dividend to $7 Should Green Gadgets cut its dividend Support your answer as best you can.

a. What is the investor's required rate of return for Green Gadgets' stock ( )% (Round to two decimal places.)

b. Assuming that the investor's required rate of return for Green Gadgets' stock does not change, what would you expect to happen to the price of its common stock if it cuts the dividend to $7 $( ) (Round to the nearest cent.)

c. Should Green Gadgets cut its dividend (Select from the drop-down menus.)

Green Gadgets (should or should not) cut the dividend because cutting the dividend will (increase or decrease) the value of the common stock.

Reference no: EM131575648

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