Harmony Corporation will pay a dividend of RM1.50 a share next year. After this, earnings and dividends are expected to grow at a 9% annual rate indefinitely. Investors currently require a rate of return of 13%. The company is considering the following two business strategies and wishes to determine the effect of these strategies on the market price per share of its stock.
Strategy 1:
Continuing the present strategy will result in the expected growth rate and required rate of return stated above.
Strategy 2:
Expanding Harmony Corporation sales will increase the expected dividend growth rate to 11% but will increase the risk of the company. As a result, the rate of return required by investors will increase to 16%.
From the standpoint of market price per share, which strategy is better? Show relevant workings to support your answer.
