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1. Tom believes the company should use the extra cash to pay a special one-time dividend. How will this proposal affect the stock price? How will it affect the value of the company? 2. Jessica believes that the company should use the extra cash to pay debt and upgrade and expand it existing manufacturing capability. How would Jessica's proposals affect the company? 3. Nolan is in favor of a share repurchase. He argues will increase the company's P/E ratio, return on assets, and return on equity. Are his arguments correct? How will a share repurchase affect the value of the company? 4. Another option discussed by Tom, Jessica and Nolan would be to begin a regular dividend payment to shareholders. How would you evaluate this proposal? 5. One way to value a share of stock is the dividend growth, or growing perpetuity, model. Consider the following: The dividend payout ratio is 1 minus b, where b is the "retention" or "plowback" ratio. So, the dividend next year will be the earnings next year, E1, times 1 minus the retention ratio. The most commonly used equation to calculate the sustainable growth rate is the return on equity times the retention ratio. Substituting these relationships into the dividend growth model, we get the following equation to calculate the price of a share of stock today: What are the implications of this result in terms of whether the company should pay a dividend or upgrade and expand its manufacturing capability? Explain. 6. Does the question of whether the company should pay a dividend depend on whether the company is organized as a corporation or an LLC?

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