SAM Ltd. has just paid a dividend of 2 per share and it is expected to grow @ 6% p.a. After paying dividend, the Board declared to take up a project…

Value of share at present = D1 / (ke-g) = 2(1.06) / (0.08-0.06) = 106 However, if the Board implement its decision, no dividend would be payable for 3 years and the dividend for year 4 would be - 2.50 and growing at 7% p.a. The price of the share, in this case, now would be: Po = (2.50 / (0.08-0.07)) X (1 / (1+0.08)³) = 198.46 So, the price of the share is expected to increase from 106 to 198.45 after the announcement of the project. The investor can take up this situation as follows: Expected market price after 3 years = 2.50 / (0.08-0.07) = 250.00 Expected market price after 2 years = (2.50 / (0.08-0.07)) X (1 / (1+0.08)) = 231.48 Expected market price after 1 years = (2.50 / (0.08-0.07)) X (1 / (1+0.08)²) = 214.33 In order to maintain his receipt at least - 2,000 for first 3 year, he would sell: 10 shares in first year @214.33 for 2,143.30 9 shares in second year @231.48 for 2,083.32 8 shares in third year @250 for 2,000.00 At the end of 3rd year, he would be having 973 shares valued @250 each i.e.2,43,250. On these 973 shares, his dividend income for year 4 would be @2.50 i.e.2,432.50. So, if the project is taken up by the company, the investor would be able to maintain his receipt of at least - 2,000 for first three years and would be getting increased income thereafter.