Hamalya Ltd. an all equity financed business, has just paid a dividend amounting to Rs. 80 million. This amount has been paid on a regular basis for many years, and the market expects to continue it. The business has 10 million ordinary shares currently quoted at Rs. 50 each. The directors have identified the opportunity to invest Rs. 60 million in one year’s time and a similar amount in two years’ time, in a project that will generate an annual cash flow of Rs. 24 million for ever, starting in three years’ time. The only possible way of financing this investment is by paying a reduced dividend for the next two years.
Required:
If the directors were to announce their intention to make this investment and to publish full details of it and the financing method, what would happen to the share price?
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