Sunnyfax Publishing Pays Out All Its Earnings and Has a Share

question 47

Multiple Choice

Sunnyfax Publishing pays out all its earnings and has a share price of $37. In order to expand, Sunnyfax Publishing decides to cut its dividend from $3.00 to $2.00 per share and reinvest the retained funds. Once the funds are reinvested, they are expected to grow at a rate of 13%. If the reinvestment does not affect Sunnyfax's equity cost of capital and earnings before the dividend cut were expected to be constant, what is the expected share price as a consequence of this decision?

• A) $36.67
• B) $41.90
• C) $52.38
• D) $62.86

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