PQ Recon Corporation has just paid a dividend of $1 per share. To undertake a project,...

PQ Recon Corporation has just paid a dividend of $1 per share. To undertake a project, the company plans to reduce dividends to $0 for the next 3 years, after which dividends will grow (from its current level) for 3 years at 30% per year, before settling down to normal growth of 10% per year. If the company does not take on this project, dividends will grow at the normal rate of 10%. Is it worthwhile for this company to take on this project, given a required rate of return of 15%?

I can find the one with constant growth for $22. I just cannot find the first scenario.

Expert Solution

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

Cell reference -

If Project undertaken, Value of Share would be $23.43

and if Project not undertaken then value share would be $22.00

Thus, Firm should accept the project as it increase the value of share.

jeff jeffy answered 2 years ago

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