Question: The Warner Corporation has earnings of $750,000 with 300,000 shares outstanding. Its P/E ratio is 16. The firm is holding $400,000 of funds to invest or pay out in dividends. If the funds are retained, the aftertax return on investment will be 15 percent, and this will add to present earnings. The 15 percent is the normal return anticipated for the corporation and the P/E ratio would remain unchanged. If the funds are paid out in the form of dividends, the P/E ratio will increase by 10 percent because the stockholders have a preference for dividends over retained earnings. Which plan will maximize the market value of the stock?