Question

Company X’s current business generates $5 per share per year. The management decides to reinvest 60%...

Company X’s current business generates $5 per share per year. The management decides to reinvest 60% of its earnings since year 1 in a project that provides aROE of 10%every year going forward.The firm’s required rate of return is 15%. The firm’s year-end dividend will be $2 per share, paid out of earnings of $5 per share.Would the value of the company be higher or lower if the company pays out all $5 as dividends every year instead?

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