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BacktoSchool (B2S) produces chocolate bars for kids. The firm's most

recent earnings before interests and taxes (EBIT) is $10 million. Analysts expect the earnings to grow at a constant rate of 5% indefinitely. The firm has an optimal debt to equity ratio of 50%. The tax rate is 30%. For the last 5 years, the firm has maintained the 50% dividend payout ratio, yet analysts expect the payout ratio to increase to 60% in future years. The equity beta is 1.5, the market risk premium is 6%, and the risk free rate is 3.5%. Since most of the firm's investors prefer dividends, B2S's CFO announces that they will increase the dividend payout ratio to 80% with the aim to increase the firm market value. Which of the following statements is correct?
A. The share value will increase because the majority of the investors prefers dividends, therefore charge a lower cost of capital.
B. The share value will increase because high dividend paying firms have lower cost of capital.
C. The share value will decrease because high dividend paying firms have lower growth.
D. The share value will remain unchanged because the higher dividends are accompanied by lower future growth.
E. None of the above.

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Subject: Business, Finance

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