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Invest and divest both started their operations at the beginning of year 1 with $300 in as

Invest and divest both started their operations at the beginning of year 1 with $300 in as

Invest and divest both started their operations at the beginning of year 1 with $300 in assets and no liabilities. Assume that both have identical businesses and ignore taxes. Both have 10 shares outstanding and reported earning per shae EPS pf $6 in year 1. Both have the option of pumping the profit back into the business. If they do so the earnings per share in year 2 will be $6.9. Invest chose to put the profits back into the business; divest paid out the entire amount in dividents. In year 2 invest reported EPS of $6.9. Invest cose to put the profits back into the business. Divest reported eps of $6 per Share.   If investors can make a 13% return elsewhere ie the cost of capital is 13% wich firm do you think is acting in the interest of the shareholders?

Abhinav 04-Dec-2019

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