Investment research analysts classified Lactolerant, Inc. as a "cash cow" because it pays out all of its earnings as dividends. But Lactolerant has recently developed a new packing technology that could provide good revenue growth potential, allowing the firm to earn a 9% return on retained earnings in future years, that is, it will generate a 9% return on its whole business going forward (not just the reinvested earnings). The new technology, however, will require continuing investment. To pay this ongoing financial obligation, Lactolerant's Board is considering a proposal to reduce its dividend payout ratio immediately from 100% to 35% (in other words, increasing its earnings retention rate from 0% to 65%). Current (t=0) earnings and dividends are $315,000. Investors are expecting-and currently earning-a return of 12% overall return. In light of this, what is the Lactolerant NPVGO? (Hint: Find the value of Lactolerant as it is today, without the new investment and growth, and then calculate its changed value with the lower current dividend payout but higher growth trajectory.) $540,067 -$581,484 $104,230 -$727,445 -$474,598
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as it is today, without the new investment and growth. - Current earnings and dividends are $315,000. - Dividend payout ratio is 100%, so all earnings are paid out as dividends. - Investors expect a 12% return. The value of the firm today (P0) can be calculated Show moreā¦
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