What is the value of the firm if it decides to pay

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The directors of XYZ company must make a decision about what to do with the firm's earnings. It has two options: 1) if the firm pays its entire earnings to shareholders as dividends, it will be able to pay a perpetual dividend of $2.00 per share. 2) If the firm reinvests part of its earnings in new projects (the growth strategy), it will be able to pay a $1.00 dividend next year and dividends will then grow at a 3% rate per year, forever. In each case, assume that the discount rate is 8%

1) What is the value of the firm if it decides to pay the $2.00 perpetual dividend?

2) What is the value of the firm if it decides to follow the growth strategy?

3) Which option would you recommend the firms pursue? Explain why this option produces the higher firm value

Reference no: EM132614298

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