正确答案：(d) The dividend growth model calculates the ex div share price from knowledge of the cost of equity capital, the expected growthrate in dividends and the current dividend per share (or next year’s dividend per share). Using the formula given in theformulae sheet, the dividend growth rate expected by the company of 8% per year and the decreased dividend of 7·5p pershare:Share price = (7·5 x 1·08)/(0·11 – 0·08) = 270p or ￡2·70This is the same as the share price prior to the announcement (￡2·70) and so if dividend growth of 8% per year is achieved,the dividend growth model forecasts zero share price growth. The share price growth claim made by the company regardingexpansion into the retail camera market cannot therefore be substantiated.In fact, a lower future share price of ￡2·49 was predicted by applying the current price-earnings ratio to the earnings pershare resulting from the proposed expansion. If this estimate is correct, a fall in share price of 7% can be expected.The share price predicted by the dividend growth model of ￡2·70 would require an after-tax return on the proposed expansionof 11·66%, which is more than the 9% predicted by the Board. The current return on shareholders’ funds is 7·5% (4·5/60),but in 2005 it was 12·8% (7·3/57), so 11·66% may be achievable, but looks unlikely.Since the market price fell from ￡2·70 to ￡2·45 following the announcement, it appears that the market does not believethat the forecast dividend growth can be achieved.