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Hello Everyone. Would anyone please be able to provide guidance on how to answer the below question? Any help would be very much appreciated.
United Engineering Company has 10 million shares in issue and has been paying dividends of EUR0.10 per share for the last five years and with its existing business is expected to be able to continue to earn sufficient profit to enable it to pay such a dividend for the foreseeable future.
The company has been offered a new contract which would take two years to complete and would involve an investment outlay of EUR500,000 in each of the next two years. The board plans to finance the investment by a reduction of dividend. If the project is undertaken, when it is completed it will increase the earnings of the company above their expected level by EUR350,000 per annum for the foreseeable future.
The current ex-div market price of an equity share of United Engineering has been consistently EUR0.90 for the last 5 years.
Required: How would the decision to reduce dividends increase or decrease in the current share price? Show calculations to justify your conclusion.
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